Tax-loss harvesting means selling an investment that is worth less than you paid to realize a capital loss, which offsets taxable gains and some ordinary income, then reinvesting so you stay in the market.
Losses first offset capital gains. If losses exceed gains, up to $3,000 a year ($1,500 if married filing separately) can offset other income, and the rest carries forward to future years.
The wash sale rule limits it. If you buy a substantially identical investment within 30 days before or after the sale, including inside your IRA, the loss is disallowed for now and added to the basis of the new shares. Harvesters usually switch to a similar but not identical fund, such as one tracking a different index.
Harvesting lowers your basis, so it mostly postpones tax rather than eliminating it, unless the shares are later given to charity or held until death. It applies only in taxable accounts.
How to check
Ask an advisor who harvests how they prevent wash sales across all your accounts, including ones they don't manage, such as a spouse's IRA or a 401(k) buying the same fund. The SEC has sanctioned a firm for claiming it monitored for wash sales when it did not.
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