Tax-Loss Harvesting
Workflow
Step 1: Identify Candidates
Scan taxable accounts for positions with unrealized losses:
| Security | Asset Class | Cost Basis | Current Value | Unrealized Loss | Holding Period | % Loss |
|---|
| | | | | ST / LT | |
Prioritize by:
- Largest absolute loss (biggest tax benefit)
- Short-term losses first (offset short-term gains taxed at ordinary income rates)
- Positions with the largest % loss (less likely to recover quickly)
Step 2: Gain/Loss Budget
Calculate the client's tax situation:
| Category | Amount |
|---|
| Realized short-term gains YTD | |
| Realized long-term gains YTD | |
| Realized losses YTD | |
| Net gain/(loss) position | |
| Carryforward losses from prior years | |
| Target harvesting amount | |
Tax savings estimate:
- Short-term losses × marginal ordinary income rate
- Long-term losses × capital gains rate
- Up to $3,000 net loss deduction against ordinary income
- Excess carries forward
Step 3: Replacement Securities
For each harvest candidate, suggest a replacement that:
- Maintains similar market exposure (same asset class, sector, geography)
- Is NOT "substantially identical" (wash sale rule)
- Has similar risk/return characteristics
| Sell | Replace With | Reason | Tracking Error Risk |
|---|
| SPDR S&P 500 (SPY) | iShares Core S&P 500 (IVV) | Same index, different fund family | Minimal |
| Vanguard Total Intl (VXUS) | iShares MSCI ACWI ex-US (ACWX) | Similar exposure, different index | Low |
| Individual stock ABC | Sector ETF (XLK) | Broader exposure, no wash sale risk | Moderate |
Step 4: Wash Sale Check
Before executing, verify no wash sales:
- Check ALL accounts in the household (taxable, IRA, Roth, spouse accounts)
- 30-day lookback: Did we buy substantially identical securities in the last 30 days?
- 30-day forward: Block repurchase of the same security for 30 days
- Check for dividend reinvestment plans (DRIPs) that could trigger wash sales
- Document the wash sale window for each trade
| Security Sold | Wash Sale Window Start | Window End | DRIP Active? | Risk |
|---|
| | | | |
Step 5: Execution Plan
| Trade # | Account | Action | Security | Shares | Est. Proceeds | Est. Loss | Replacement | Notes |
|---|
| | Sell | | | | | | |
| | Buy | | | | | | |
Summary:
- Total estimated losses harvested: $
- Estimated tax savings: $ (at marginal rate of %)
- Net portfolio impact: minimal (replacement securities maintain exposure)
- Wash sale window management: [dates]
Step 6: Post-Harvest Tracking
After 30+ days, optionally:
- Swap back to original securities (if preferred)
- Maintain replacement securities (if no reason to switch back)
- Update cost basis records
- Document for tax reporting
Step 7: Output
- Harvest opportunity list (Excel)
- Trade execution sheet
- Wash sale tracking calendar
- Tax savings estimate summary
- Replacement security rationale
Important Notes
- Wash sale rules are strict — violations disallow the loss AND adjust cost basis
- Substantially identical means same security, not same asset class — ETFs tracking different indexes are generally fine
- Always coordinate across all household accounts including retirement accounts
- Consider the long-term cost basis step-down — harvesting resets cost basis, which means more gains later
- Year-end is prime harvesting season but opportunities exist throughout the year
- Mutual fund capital gains distributions in December can create additional harvesting urgency
- Document everything for tax reporting and compliance
- Not all losses are worth harvesting — transaction costs and tracking error have real costs