Tax-Loss Harvesting

## Tax-Loss Harvesting

Tax-loss harvesting is the practice of selling investments at a loss to offset capital gains and reduce tax liability. It is particularly relevant for employees with large equity compensation packages who face significant capital gains upon selling vested shares.

### How It Works

1. Sell an investment that has declined in value.
2. Use the realized loss to offset realized capital gains.
3. If losses exceed gains, deduct up to $3,000 against ordinary income (US).
4. Carry forward remaining losses to future tax years.

### Wash Sale Rule

In the US, you cannot buy a "substantially identical" security within 30 days before or after the sale. Violating this rule disallows the loss deduction.

### Example for Tech Employees

An engineer sells $100,000 of vested RSU shares (gain: $60,000). Separately, they hold $20,000 in index funds at a $5,000 loss. Harvesting that loss reduces taxable gains to $55,000, saving approximately $1,000–$1,500 in taxes at the 15–20% long-term rate.

### Limitations

- Cannot create artificial losses purely for tax benefit.
- Wash sale rule limits repurchase timing.
- Losses only defer taxes if you reinvest in similar (not identical) assets.