Tax Loss Harvesting

As 2023 heads to a close, many investors are considering whether to sell investments at a loss, often referred to as tax loss harvesting. In this post, we explain this tax opportunity and the financial benefit possible from it. We also describe a pitfall that investors should avoid to achieve the benefit of tax loss harvesting.

Short-term or long-term?

Why is tax loss harvesting important? To begin, ETF investors must understand the difference between short-term and long-term gains or losses. An investor realizes a short-term loss when they sell an ETF held for less than one year. In general, taxes on losses on short-term investments in securities like ETFs occur at a higher rate than those gains realized from short-term investments. For taxpayers at the highest rates, the short-term rate is 37%, and the long-term rate is 20%.

So, if an investment is below its purchase price within one year of holding it, an investor can sell it and realize a short-term loss. This short-term loss can be deducted from any short-term gains, like those from bond or money market investments. Consequently, an investor’s income tax may be reduced.


The most obvious pitfall is the wash sale rule. Investors may not obtain a tax benefit if they sell an ETF for a loss within 30 days, and then rebuy it. Consequently, such a violation eliminates the opportunity for tax-loss harvesting. Investors wishing to stay invested in the markets can opt to buy a different ETF that is not “substantially identical” and not wait 30 days.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in tax-efficient investing with ETFs

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