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Investing

What is Tax-Loss Harvesting (TLH)?

An automated or manual portfolio strategy that sells losing ETFs to realize capital losses, offsetting capital gains and up to $3,000 of ordinary income per year.

What is Tax-Loss Harvesting?

Tax-loss harvesting (TLH) turns temporary market dips inside a taxable brokerage account into permanent IRS tax savings without taking you out of the market.

How Automated TLH Works (Wealthfront / Betterment)

  1. Suppose your S&P 500 ETF (VOO) drops $8,000 below your purchase price during a market correction.
  2. The algorithm sells VOO to lock in an $8,000 realized capital loss and simultaneously buys a highly correlated—but not "substantially identical"—ETF (such as SCHB or ITOT) in the same second.
  3. Your portfolio stays 100% invested in U.S. equities, while the $8,000 loss offsets 100% of any realized capital gains PLUS up to $3,000 of ordinary W-2/1099 income on Schedule D, with unused losses carrying forward indefinitely.

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