Tax-Loss Harvesting

Core Concepts

Candidate Identification

Scan the portfolio for positions with unrealized losses that meet all three filters:

• Materiality threshold: Minimum absolute loss (e.g., $2,000) or minimum loss-to-value ratio (e.g., loss exceeds 5% of position market value). Harvesting a $200 loss on a $50,000 portfolio is not worth the operational cost.
• Holding period filter: Positions held less than 31 days may not have meaningful losses and create short-term wash-sale complexity. Positions approaching the one-year mark (days 335-365) may benefit from waiting to convert a short-term loss into a long-term loss only if the position is expected to continue declining.
• Loss magnitude ranking: Rank candidates by Tax Benefit = Unrealized Loss * Applicable Tax Rate. Prioritize short-term losses (taxed at ordinary rates up to 37%) over long-term losses (taxed at capital gains rates of 15-20%) when gain/loss budget allows.

Gain/Loss Budgeting

Before harvesting, build the year-to-date tax budget:

1. Realized gains YTD: Sum all short-term and long-term capital gains already realized (including fund distributions).
2. Planned gain exposure: Estimate gains from pending rebalancing trades, planned liquidations, or expected fund capital gain distributions.
3. Loss carryforward balance: Check prior-year unused capital loss carryforwards (these offset gains before new harvests do).
4. Target harvest amount: Target Harvest = (Realized Gains YTD + Planned Gains) - Loss Carryforward + $3,000 ordinary income offset. Harvesting this amount offsets all expected gains AND captures the full $3,000 annual deduction against ordinary income; harvest more to build carryforward for future years.