What is tax-loss harvesting?

Tax-loss harvesting is the practice of selling an investment that has declined in value to realize a capital loss, which can offset capital gains and, within limits, ordinary income. Investors typically redeploy the proceeds into a similar (but not substantially identical) position to maintain market exposure. It is an educational concept described here for illustration only. For authoritative rules see IRS Publication 550.

What is the wash-sale rule?

The wash-sale rule disallows a loss deduction if you buy the same or a substantially identical security within 30 days before or after the sale that created the loss. The disallowed loss is generally added to the basis of the replacement security. The rules and exceptions are described in IRS Publication 550.

What is the difference between short-term and long-term capital gains?

Gains on assets held one year or less are short-term and are generally taxed at ordinary income rates. Gains on assets held more than one year are long-term and are generally taxed at preferential long-term capital gains rates. Holding period and rate details are explained in IRS Publication 550.

No. This page is an illustrative, educational model only and is not tax, legal, or investment advice. The tax rates shown are example inputs you should change to reflect your own situation, and the results are hypothetical. Consult a qualified tax professional and refer to IRS Publication 550 for authoritative guidance.

Tax-Loss Harvesting Alpha Calculator

Adjust the assumptions below to see how systematic tax-loss harvesting could decompose into ordinary-income losses and long-term gains. All Sharpe, return, and volatility values are assumed, illustrative parameters — not a track record — and this tool is educational only, not tax advice.

Tax Loss Harvest Fund Systematic Tax Alpha

Return on Capital

5.50%

Annualized fund return

Est. +1 std Gain

+8.50%

1 standard deviation upside

Est. -1 std Loss

+2.50%

1 standard deviation downside

Ordinary Income Loss

-2.83%

-13% × (33%/33%) × 1.0x × 0.66

Long-Term / Qualified Gain

+3.92%

+18% × (33%/33%) × 1.0x × 0.66

Net Tax Alpha

+1.09%

(ord × 21% − ord × 45%) / 45%

Adjust Assumptions

Max Position Size

Max Leverage

Ordinary Tax Rate

LT Capital Gains Rate

The pre-filled rates are example values you should change to match your own situation. For the 2026 tax year the top federal ordinary income rate is 37% and the top federal long-term capital gains rate is 20%; the higher defaults above are illustrative blended figures (e.g., including assumed state tax). Figures exclude state and local tax and the 3.8% Net Investment Income Tax (NIIT) unless you build those into the rates you enter.

How Tax Loss Harvesting Works

Harvest Short-Term Losses

Systematically realize short-term losses, generating ordinary income deductions at the higher tax rate.

Reinvest in Correlated Assets

Redeploy capital into similar (non-wash-sale) positions to maintain market exposure.

Realize Long-Term Gains

Hold replacement positions past one year, converting gains to the preferential LT rate.

Compound Tax Alpha

The spread between ordinary deductions and LT gains generates persistent tax alpha.