Markets are down. Robo-advisors and savvy investors are tax-loss harvesting.

But me? I had no intention of doing so.

Thankfully, two Go Curry Cracker readers correctly pointed out I was wrong to not tax-loss harvest.

Yes, I absolutely am tax-loss harvesting and loving it. (Thanks!)

Tax-loss Harvesting

First – What is tax-loss harvesting? A (very) brief summary…

You own a stock/ETF/Mutual fund in a taxable account that is now worth less than you paid for it. You sell it, realizing a capital loss. In fact, you sell it solely for the purpose of realizing the loss.

With the cash from the sale, you buy a different fund*. Your asset allocation is 99.9%/exactly the same as before, but now you have a shiny new loss to show the IRS.

That’s it. Enjoy the tax deduction (yes, there is nuance that isn’t covered here…)

* any fund that follows a different index. In IRS-speak, a non-substantially identical investment.

Benefits of Tax-Loss Harvesting

With a realized loss on a tax return, we get a few main benefits.

First, income is lower. Lower income = lower taxes at all levels, Federal / State / ACA.

Second, tax deferral. Because our portfolio basis is now lower, we may owe some taxes in the future… but in the mean time we benefit from tax deferral. Those possible taxes might not be due for 10, 20… 50 years. Or ever.

Third… the conversion of a capital loss into an ordinary loss equivalent.

If losses EXCEED gains then you can use up to $3,000 per year to offset ORDINARY INCOME. (Any additional loss carries forward.)

Tax rates on capital gains are low, often 0%. If you are paying no tax on long-term capital gains, getting a deduction against them is worth zero (at least on federal taxes.)

But tax rates on ordinary income are much higher, in the range of 12-22% for most people (but as high as 37%!)

Tax loss harvesting converts that lower-value capital loss into a high-value ordinary loss equivalent. A $3,000 tax deduction for somebody in the 37% tax bracket is $1,110!

And finally… a capital loss carryover. Any amount of capital loss that cannot be deducted this year will carry forward. This can allow for many years of tax-free stock sales.

That all sounds pretty good.. so, why was I not planning to tax-loss harvest?

Why I don’t Tax-loss harvest

I spent nearly 10 years aggressively capital gain harvesting, raising our basis $325,000 in our stock portfolio at no/low tax. Then I chose to pay more tax to raise our basis an extra ~$100,000 before returning to the US. High basis means our taxable income stays low even as we regularly sell stock.

There were opportunities to tax-loss harvest along the way when the market was down, of course, but it would have been a wasted gesture – we paid zero tax and more deductions wouldn’t change that. Plus, any realized loss would just be neutralized by the next gain harvest.

I Want Stock at High Basis

Your basis in an investment is what you paid for it, including transaction costs. If you pay $10,000 for shares of $X, your basis is $10,000.

Basis is important when selling stock. If basis is high then more of each sale is a tax-free return of capital / less of each sale is a taxable capital gain.

This chart from the post Long Term Long-Term Capital Gains shows this visually.

When I sell $10,000 worth of stock, I prefer the realized capital gain to be closer to $1,000 than $5,000.

The difference can mean us paying $1000/year for health insurance vs paying $1,000 PER MONTH, which seems important.
(See: Obamacare Optimization in Early Retirement.)

This is why I have spent the last decade aggressively capital GAIN harvesting. I want stock at high basis.

But… tax-loss harvesting does the opposite. More of each sale is a taxable gain.

And this is where my thinking on this had stopped – as an expat I never needed to think beyond the basic idea that high basis was best.

High Basis / Loss Carryover Combo

When I decided I would not tax-loss harvest, this is what I was missing…

High basis is great. But the combination of high basis with a capital loss is actually SUPERIOR.

I can take the full sum of losses across the portfolio and then apply that as a deduction against only the shares we sell.

Even with high basis – over time, the amount of taxable income on a $10,000 stock sale increases as stock prices rise. We shift to the right on the basis chart.

But with the combination of a capital loss… we truly can have a zero income scenario on portfolio withdrawals, possibly for many years.

Even with high basis, as stocks go up we still get a non-zero capital gain on stock sales, even if small. But we also have a capital loss… we truly get a $0 income scenario on portfolio withdrawals.


Sell $10k of stock that has doubled in value -> $5k taxable gain.

Or – tax-loss harvest $50k across the portfolio, setting basis on many shares 25% lower

Sell same $10k stock -> $6,250 taxable gain – $6,250 tax-loss = zero income / no tax

The typical Early Retiree Scenario à la Go Curry Cracker

This year (2022) the market is down 25% +/- and I have the opportunity to tax-loss harvest.

Ironically I only have this opportunity because of significant capital gain harvesting in prior years and choosing to invest a recent mortgage. As such, I have about $50,000 in losses I could realize.

We are a low-income household so we pay no federal income tax. Any tax due is wiped out by deductions and credits.

But we do pay California state income tax and ACA health insurance premiums, both of which are a function of income.

I have already sold some stock this year to get cash to fund my Roth solo-401k ($20,500) and his/her Roth IRAs ($12,000.) In doing so I realized a loss of ~$4,000 and will most likely have a full $3,000 deduction against ordinary income. For clarity – the goal was to fund retirement accounts; a deductible loss was a side-effect (although I was careful to avoid the wash sale rule – can’t buy similar asset 30 days before/after.)

This $3,000 loss will save us about 4% on California taxes ($120) and 10-12% on our insurance premiums for the year (~$330+/-.) Technically this would also save us 10% on federal income taxes, but all it does in practice is lose an equal amount in Child Tax Credits.

I fully appreciate saving ~15% and having an extra $450 in my pocket. If I didn’t, I could do a $3,000 Roth conversion to bring us back to the same position. Who doesn’t love tax-neutral Roth conversions?

So why not realize an additional loss of $46k to carry forward? Or if not the full amount, surely a few years’ worth * $3,000? After all… if the market recovers, this opportunity will disappear along with the loss.

Surely tax-loss harvesting can’t be the perfect tax minimization tool… there must be some negatives or risks?

There are at least 3 (which I seldom see discussed in the tax-loss harvesting guides.)

Loss of Capital Loss Carryover

One of the best features of tax-loss harvesting is the loss carryover – if you don’t use all of your deduction this year you can use it next year. Or any year.

But it would be a bummer to go through the work of tax-loss harvesting and have your capital loss carryover disappear over time with zero benefit. Or worse, get a higher tax bill due to that lower basis thing I mentioned.

If you generally pay zero tax on capital gains and/or are a lower income household such as ours this is a real possibility (external link.)

Example 1 – early retiree / lower income household

This year maybe I tax-loss harvest and realize a $10,000 loss, lowering our basis by the same $10k. Without any capital gains, $3,000 is used to offset our ordinary income from interest/blog/job/non-qualified dividends, and $7,000 carries forward for future use.

Next year income overall is low and I sell some stock to get our spending money. Income is less than ~$100k so our dividends and long-term capital gains are taxed at 0% (at the federal level*.)

The capital loss carryover offsets some of our capital gains that were not taxed anyway and is gone forever.

In year 3 I sell some more stock to buy a boat, which means selling a bunch of shares including those I tax-loss harvested earlier. With $10k lower basis we have to pay some extra tax.

Example 2 – capital gains distributions

Maybe you don’t plan to sell any stock for the foreseeable future so you aren’t concerned about wasted capital loss carryover.

But then… BAM, your index funds distribute some capital gains (external link.) In December. With minimal notice and no time to do anything to compensate.

Because income is low this would have been an untaxed distribution… but it wipes out the carryover.

* the capital loss carryover and associated lower gross income may still help with state taxes or health insurance premiums.

Higher Future Taxes

Not a week goes by where I fail to see somebody starting a sales pitch with the phrase, “Since taxes are going to go up in the future…” (probably a whole life insurance guy.)

Maybe taxes are going up, maybe they aren’t. But tax laws don’t need to change in order to pay more taxes in the future due to tax-loss harvesting.

This year a small capital loss might save us 4% on State taxes and 10-12% on ACA premiums. That is a ~15% tax increase over the 0% we would have saved from a loss a few years ago.

If we managed to carry forward our losses undisturbed for many years… to a date when we are collecting Social Security and perhaps start to face RMDs, the ~16% we could save today could easily reach the maximum capital gains tax rate of 23.8%. (Because of tax deferral this isn’t a guaranteed loss… time value of money, etc… We are 25 years away from RMDs so even a minimal return will make a 16% savings now the right choice.)

Complete loss of tax-loss due to IRA dividend reinvestment

A lot of “how to tax-loss harvest” guides start with this phrase: completely disable dividend reinvestment in ALL of your accounts. This includes your spouse’s accounts!

Which is fine… maybe you like another monthly/quarterly item on your to do list or to hold uninvested cash in your IRAs.

This is because of wash sale risk, a part of the tax-loss harvesting nuance. This says if you buy a substantially identical investment 30-days before or after realizing a capital loss, the loss is washed away – no tax deduction this year and no adjustment to basis (unless you also sell the shares that caused the wash sale.) A common cause of a wash-sale is the reinvestment of dividends…

Now… if this purchase occurs inside of an IRA… the loss is washed away FOREVER. There is no adjustment to basis in your IRA and you will be taxed on the full value upon withdrawal.

In theory, this is difficult for the IRS to enforce. They don’t get a record of all of your IRA transactions (as of today.) But in an audit situation they very well could uncover a wash sale.

For an example, see the Investopedia article, Can IRA Transactions Trigger the Wash-Sale Rule? (external link)


As an expat with no tax burden, I didn’t see the value in tax-loss harvesting. Any tax-loss would just be offset by my next capital gain harvest.

But as a US resident with State and ACA tax burden, tax-loss harvesting is a big win. We can benefit from ordinary losses for several years AND increase the number of years where we can sell shares with no/low capital gains.

It isn’t all guaranteed and risk free, but we can avoid what I see as the 3 main risks.

I am absolutely tax-loss harvesting.

Thanks to readers Dan and Mighty Investor for the valuable feedback!

Are you tax-loss harvesting?