I know I should be doing more tax-loss harvesting. I know it. We have way too much concentrated tech stock, I have been looking into direct indexing, and every year I tell myself this is the year I get serious about it. And every year I do not do nearly enough.
So I built this calculator for myself as much as for you. I wanted to see the actual number. Not a vague “it saves you money” but the real dollar amount based on my bracket, my state, and my actual losses. Because once you see what you are leaving on the table, it gets a lot harder to keep putting it off.
- Tax-loss harvesting means selling investments that are down to get a tax break
- Those losses offset your gains so you pay less tax this year
- If your losses are bigger than your gains, you can deduct up to $3,000/year against your salary
- For stocks: you cannot rebuy the same one for 30 days (wash sale rule)
- For crypto: you CAN rebuy immediately. No wash sale rule applies (as of 2025)
- High earners in expensive states can save 50+ cents per dollar harvested
- Tax brackets and state rates below are auto-updated from IRS data
What Is Tax-Loss Harvesting?
You have investments that are down. Maybe tech stocks that dropped, crypto that crashed, or just a few positions in your portfolio that went the wrong way.
Right now those losses are just sitting there on paper, doing nothing for you.
Tax-loss harvesting means you sell those losers on purpose. Not because you are giving up on the market. You immediately buy something similar so you stay invested. But by selling, you “lock in” the loss on your tax return. The IRS lets you use that loss to cancel out gains you made elsewhere. Less gains on paper means less tax you owe.
That is it. That is the whole concept. Sell the losers, keep the tax break, stay invested.
How It Actually Works (Step by Step)
Step 1: Find positions that are down. Look through your taxable brokerage account for anything you bought that is now worth less than what you paid.
Step 2: Sell them. This “realizes” the loss. It is now real on paper, not just theoretical.
Step 3: Buy something similar immediately. You do not want to be out of the market. If you sold an S&P 500 fund (VTI), buy a different S&P 500 fund (ITOT). Same market exposure, different ticker. This matters for the wash sale rule (more on that below).
Step 4: Claim the losses on your taxes. Your losses offset your gains dollar for dollar. If you had $30,000 in gains and harvest $30,000 in losses, your taxable investment income drops to zero.
What if your losses are bigger than your gains? The extra losses do not disappear. Think of them like a gift card. You can use up to $3,000 per year to reduce your regular income (salary, bonuses). The rest carries forward to next year. This gift card never expires. You keep using it until it runs out.
Why This Matters More Than You Think
Most people hear “tax savings” and think it is a few hundred dollars. For high earners, the math is dramatically different.
Your tax rate on investment gains is not just the federal rate. It stacks:
- Federal rate: Up to 37% on short-term gains (held less than a year)
- State rate: New York adds 10.9%. California adds 13.3%. Even “low tax” states like Colorado add 4.4%.
- NIIT surtax: If your household earns over $250,000, you pay an extra 3.8% on investment income
Stack those up and a New York household earning $400K has a combined rate above 50% on short-term gains. That means every $10,000 in losses you harvest saves you over $5,000 in taxes. That is real money you keep invested instead of sending to the IRS.
The Rules: Stocks vs. Crypto
Stocks: The 30-Day Rule
The IRS has one big rule for stocks: the wash sale rule. If you sell a stock at a loss, you cannot buy the exact same stock back within 30 days. If you do, the IRS pretends the sale never happened and your loss does not count.
The workaround is simple. Sell one fund, buy a different fund that tracks the same thing. Common swaps:
- Sell Vanguard Total Stock Market (VTI), buy iShares Core S&P Total US (ITOT)
- Sell SPDR S&P 500 (SPY), buy Vanguard S&P 500 (VOO)
- Sell individual tech stocks, buy a tech sector ETF (or vice versa)
After 30 days you can swap back if you want.
Crypto: No Wash Sale Rule (Yet)
This is the big one most people miss. As of 2025, the wash sale rule does not apply to cryptocurrency. Bitcoin, Ethereum, everything.
That means you can sell your Bitcoin at a loss and buy the exact same Bitcoin back five seconds later. You keep the loss on your taxes. You keep the Bitcoin. The IRS has been talking about closing this loophole but has not done so yet.
If you are sitting on crypto losses, this is free money on the table.
Direct Indexing: Tax-Loss Harvesting on Autopilot
If you hold a total market index fund like VTI, you own 4,000 stocks in one package. When the market drops, some of those stocks are up and some are down. But because they are bundled in one fund, you cannot harvest the individual losers.
Direct indexing solves this. Instead of buying VTI, you buy the individual 500 (or 1,000+) stocks separately. When Apple drops but Microsoft is up, you can sell Apple at a loss, claim the tax break, and buy something similar. The net effect on your portfolio is the same. You just get tax breaks along the way.
Services like Wealthfront, Betterment, Fidelity, and Schwab offer direct indexing. It is especially powerful if you have concentrated stock positions (like a lot of tech) and want to diversify while harvesting losses along the way.
The One Catch: Cost Basis Reset
Tax-loss harvesting is tax deferral, not tax elimination. Here is why.
When you sell a stock at a loss and buy a replacement, your new shares have a lower cost basis. That means when you eventually sell the replacement, you will owe tax on a bigger gain.
But paying $1 in taxes ten years from now is better than paying $1 today. That dollar stays invested and compounds in the meantime. And if you hold until you pass away, your heirs get a stepped-up cost basis. The deferred tax just disappears.
FAQ
Is tax-loss harvesting worth it?
Yes, if you have a taxable brokerage account with positions that are down. Even at a 15% capital gains rate, harvesting $20,000 in losses saves $3,000. At higher brackets with state taxes, you can save 40-50% of the harvested amount. The only cost is a lower cost basis on your replacement shares.
What is the $3,000 tax-loss harvesting limit?
The $3,000 limit only applies to losses left over after offsetting all your gains. There is no limit on how much loss can offset gains. If you have $50,000 in losses and $50,000 in gains, you offset everything. The $3,000 limit only kicks in for the excess.
Can you tax-loss harvest crypto?
Yes, and it is even easier than stocks. As of 2025, the wash sale rule does not apply to cryptocurrency. You can sell crypto at a loss and immediately rebuy the exact same coin. You keep the loss on your taxes and keep your position. This loophole may close eventually, so take advantage while it exists.
What is the wash sale rule?
For stocks and ETFs, you cannot buy a “substantially identical” security within 30 days before or after selling at a loss. If you do, the loss is disallowed. The fix: buy a different fund that tracks the same index. Sell VTI, buy ITOT. Same market exposure, loss still counts. This rule applies across all your accounts, including IRAs.
Can you do tax-loss harvesting in an IRA or 401(k)?
No. Tax-loss harvesting only works in regular taxable brokerage accounts. IRAs and 401(k)s are already tax-sheltered, so selling at a loss inside them has no tax benefit. You need to have investments in a regular (non-retirement) account to harvest losses.
What is direct indexing?
Instead of buying an index fund (which bundles thousands of stocks), you buy the individual stocks separately. This lets you sell the losers for tax benefits while keeping the winners. Services like Wealthfront, Betterment, and Fidelity offer this. It is especially useful for large taxable portfolios where the tax savings compound over time.