Can I tax-loss harvest inside my 401(k) or IRA?

Generally no — tax-loss harvesting is relevant for taxable brokerage accounts, since trades inside tax-advantaged retirement accounts don't trigger the capital gains taxes that harvesting is designed to offset.

What happens if I accidentally trigger a wash sale?

If a wash sale occurs, the tax loss is generally disallowed for that transaction, though it's typically added to the cost basis of the replacement investment, which can reduce a future gain (or increase a future loss) when that replacement is eventually sold.

How much loss can I use to offset ordinary income each year?

There's generally an annual limit on how much net capital loss can offset ordinary income, with any excess carried forward to future tax years — checking current IRS rules or consulting a tax professional for the specific limit is worthwhile.

Tax-Loss Harvesting: A Practical Guide

What is tax-loss harvesting and how does it work? Tax-loss harvesting generally means selling an investment at a loss to offset capital gains (and potentially a limited amount of ordinary income) elsewhere in a taxable account, then typically reinvesting the proceeds in a similar (but not identical, to avoid the wash-sale rule) investment to maintain market exposure.

Article Summary

Tax-loss harvesting is only relevant in taxable brokerage accounts — it generally doesn't apply inside tax-advantaged accounts like a 401(k) or IRA.
The wash-sale rule generally disallows the tax loss if you buy a "substantially identical" investment within a set window around the sale.
Harvested losses can offset capital gains and a limited amount of ordinary income each year, with any excess generally carried forward to future years.

"It's not how much money you make, but how much money you keep."
Robert Kiyosaki

Nobody enjoys watching an investment lose value, but a loss in a taxable account isn't purely bad news from a tax perspective — it can be used strategically to offset gains elsewhere, reducing your overall tax bill. This practice, tax-loss harvesting, has become common enough that many robo-advisors now automate it, but understanding the mechanics helps you evaluate whether it's being done well, or whether it's worth doing yourself.

The Basic Mechanics

Tax-loss harvesting generally involves selling an investment that has declined in value below your purchase price, realizing a capital loss that can be used to offset capital gains realized elsewhere in your taxable account during the same tax year.

If your total losses exceed your total gains in a given year, you can generally use a limited amount of the excess loss to offset ordinary income, with any remaining unused loss typically carried forward to offset gains or income in future years.

The Wash-Sale Rule

A key rule to understand is the wash-sale rule, which generally disallows the tax loss if you purchase a "substantially identical" investment within a window (typically 30 days before or after the sale). This rule prevents simply selling and immediately rebuying the exact same investment purely to capture a tax loss while keeping your position essentially unchanged.

To stay invested while harvesting a loss, investors commonly sell one investment and immediately buy a similar, but not substantially identical, alternative — for example, swapping between two different index funds tracking similar but distinct indexes — though the exact boundaries of "substantially identical" can require careful judgment.

Automated Tax-Loss Harvesting

Many robo-advisors now offer automated tax-loss harvesting as a built-in feature, continuously monitoring taxable accounts for harvesting opportunities and executing trades while managing wash-sale rule compliance automatically.

This automation can capture harvesting opportunities more consistently than manual, periodic review, though it's worth understanding whether your specific platform offers this feature and how it's priced, since not all platforms include it, and some charge extra for it.

When Tax-Loss Harvesting Is Worth the Effort

Tax-loss harvesting is generally only relevant for taxable brokerage accounts, since tax-advantaged accounts like 401(k)s and IRAs don't involve capital gains taxes on individual trades in the same way. It tends to matter more for investors with meaningful realized gains to offset, or higher overall tax rates where offsetting ordinary income has more value.

For very small taxable accounts or investors without significant capital gains to offset, the effort and transaction complexity may not be worth the modest tax benefit — it's worth weighing the actual expected tax savings against the complexity involved.