Tax-loss harvesting

Tax-loss harvesting means deliberately selling an investment that has fallen below its purchase price so that the loss is realised and can be set against capital gains made elsewhere, reducing the tax bill; in some countries surplus losses can be carried forward or set against a limited amount of other income. To stay invested, the investor often puts the proceeds into a similar but not identical investment, such as a fund tracking a different index in the same asset class. It is relevant only in taxable accounts, since gains and losses inside tax-advantaged wrappers are ignored for tax.

Tax authorities restrict the obvious trick of selling and immediately buying back. In the US, the wash-sale rule disallows a loss if you buy a substantially identical security within 30 days before or after the sale; in the UK, shares of the same class bought back within 30 days are matched with the sale, so the loss is not recognised in the usual way. The benefit is often a deferral rather than a permanent saving: the new holding has a lower cost basis, so more gain may be taxed later. Trading costs, spreads and a poorly matched replacement can outweigh the tax benefit.