Tax-Loss Harvesting

Tax-loss harvesting does not eliminate tax — it defers it. When you sell at a loss and buy a replacement, your cost basis resets lower. When you eventually sell the replacement, you owe tax on the gains from the new lower basis. So why bother?

Time value of money. The tax saved this year is dollars you keep invested for decades. At 7% real return over 30 years, every dollar saved becomes ~$7.60. A $2,900 tax harvest today (a single $10K loss × 29% combined rate) is the same as $22,000 of compound growth over 30 years. The savings multiply.

Step-up at death. If your appreciated replacement is held until you die, your heirs inherit at the stepped-up basis — meaning the deferred tax is permanently extinguished. This is the killer combination wealthy families use: harvest losses every year, never sell, leave the appreciated security to heirs.

The catch is the wash-sale rule. The IRS doesn't want you selling at a loss on Monday and buying back the same security on Tuesday. So they disallow the loss if you re-purchase a “substantially identical” security within 60 days (30 before + 30 after). Buying a different ETF that tracks a similar index is fine — that's why the replacement pairs above exist.