Tax Loss Harvesting: Smart Strategy or Overhyped?
Tax loss harvesting (TLH) is one of the most popular tax strategies in modern portfolio management. The idea is simple: sell investments that have lost value, use those losses to offset your capital gains, and potentially reduce your tax bill. Robo-advisors like Wealthfront and Betterment have made TLH a core selling point, claiming it can add 0.5-1.5% to your after-tax returns annually.
But how much does it actually save? This calculator breaks down the real numbers.
How TLH Works
Short-term losses offset short-term gains first (which are taxed at your ordinary income rate), then long-term gains. If losses exceed gains, you can deduct up to $3,000 of net losses against ordinary income per year, with the remainder carrying forward indefinitely. The tax savings come from the spread between the tax rate you'd pay on gains and the return you earn by reinvesting the deferred tax.
When TLH Actually Matters
- High tax brackets: If you're in the 32%+ federal bracket plus state tax, the savings become meaningful.
- Large realized gains: If you sell winners (from rebalancing or concentrated positions), TLH directly offsets those gains.
- Bear markets: Market downturns provide abundant harvesting opportunities — 2022 was a TLH goldmine.
When TLH is Overrated
For most investors in lower brackets, TLH is vastly overhyped. The annual savings are often a few hundred dollars — nice, but not life-changing. And there are real costs: wash sale rules can trap you, portfolio tracking becomes more complex, and robo-advisor fees can eat the benefit. More importantly, TLH is a tax deferral strategy, not a tax elimination strategy. You reduce your basis, so when you eventually sell, you pay more tax later. If your future tax rate is the same (or higher), the benefit shrinks or disappears.
The Bottom Line
TLH is a free lunch — but it's a small appetizer, not the main course. Set it and forget it with a robo-advisor if you want; don't let the tax tail wag the investment dog. The real wealth-building decisions are saving rate, asset allocation, and staying invested through downturns.
How This Calculator Uses 2026 Tax Rules
The calculator models the federal treatment of capital losses as it stands for 2026. Losses first offset short-term gains — taxed at your ordinary income rate, up to 37% — then long-term gains, which are taxed at 0%, 15%, or 20% depending on your taxable income, plus the 3.8% Net Investment Income Tax for single filers with MAGI above $200,000 and joint filers above $250,000. The tool applies your combined federal and state rate to short-term offsets and a reduced rate to long-term offsets, which is a simplification of the real Schedule D ordering but captures the right shape of the result. Limits and brackets change yearly, so treat the output as an estimate and confirm the current figures on IRS.gov.
Reading Your Results Correctly
Three numbers matter. The first-year savings is the cash value of your harvest this tax season. The five- and ten-year projections grow that savings at 7% per year — the standard long-run equity assumption — to show the compounding value of reinvesting deferred tax. The effective tax saved figure divides your first-year savings by your harvested losses, giving you the rate your harvest actually earned. If that number looks small, remember the missing piece: this tool assumes you avoid wash sales, that you have gains to offset, and that your bracket stays constant. Real harvesting adds state taxes, carryforwards, and bracket changes into the mix, so the projections are directional, not promises.
The Wash Sale Rule and Your Results
One assumption silently underpins every output: that you do not repurchase a substantially identical security within 30 days before or after the sale. Do that, and the loss is disallowed — your real savings drops toward zero while the calculator still shows a healthy number. Before you harvest, turn off automatic dividend reinvestment on the security you are selling, and check every account you control, including IRAs, for repurchases in the window. The rule exists to stop taxpayers from manufacturing losses while keeping the same economic position; respect it, and the calculator's numbers are yours.