Tax-Loss Harvesting: How to Cut Your Capital Gains Tax Legally

When you sell an investment at a loss, you can use that loss to reduce the taxes you owe on gains elsewhere—that’s tax-loss harvesting, a legal strategy to lower your capital gains tax by selling losing investments to offset taxable gains. Also known as tax harvesting, it’s not about avoiding taxes—it’s about managing them smarter.

This strategy works best with ETFs, exchange-traded funds that trade like stocks and allow precise control over which shares you sell. Unlike mutual funds, ETFs give you control over your tax lot management, the method you use to choose which shares to sell when calculating gains or losses. You can pick the highest-cost shares to sell, lowering your tax bill. That’s why tools like Specific ID vs FIFO matter—they’re not just jargon, they’re how you save thousands.

It’s not just about selling losers. Timing matters. If you’ve had big gains from stocks or funds this year, tax-loss harvesting can balance the scales. But you can’t buy back the same asset right away—that’s the wash sale rule, and breaking it cancels your loss. Instead, swap into a similar but not identical fund. For example, trade a U.S. large-cap ETF for another one tracking a slightly different index. It keeps your portfolio aligned while locking in the tax benefit.

You don’t need a fancy account to do this. Most brokerages let you manage tax lots directly in their platforms. And it’s not just for big investors—anyone who sells assets for a profit can use this. Even if you only made $500 in gains, harvesting $500 in losses wipes it out. No tax due. That’s real money in your pocket.

Some people think tax-loss harvesting is only for the end of the year. It’s not. Market dips happen anytime. If a stock you own drops 20% in March, waiting until December means you miss a chance to act. The best time to harvest? When the loss is clear, and you’re not emotionally tied to the asset. It’s not about guessing the bottom—it’s about locking in the loss and moving on.

And it’s not just about stocks. Bonds, REITs, even international funds can be part of the strategy. If you hold unhedged international bond funds and the dollar strengthened this year, you might have a paper loss that can offset gains elsewhere. That’s the power of diversification meeting tax efficiency.

What you’ll find in the posts below aren’t theoretical guides. They’re real examples—how one investor saved $8,200 using Specific ID, why a money market fund can be part of a harvest plan, and how ETFs make this easier than ever. You’ll see how tax-loss harvesting fits into broader strategies like bucketing retirement funds or managing risk across time horizons. This isn’t a one-time trick. It’s a tool you use every year, adjusting as your portfolio grows.