What Is Tax Loss Harvesting? How It Works

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What is Tax-Loss Harvesting?

Selling investments at a loss can lower your tax bill while keeping you fully invested.

july 10, 2026 | 6MIN

Authors

Vise

How Tax Loss Harvesting works

Tax Loss Harvesting is the practice of selling an investment that has dropped below its purchase price to realize a capital loss, then using that loss to offset capital gains (and up to $3,000 of ordinary income a year) while staying invested in the market.

Spot a Loss

A holding falls below its cost basis (what you paid for it).

Harvest it

Sell the position. While you still own it, the drop doesn’t count for tax purposes; selling makes it a capital loss you can use against taxable gains.

Stay invested

Reinvest the proceeds in a similar but not substantially identical security, so your market exposure doesn't break.

Lower the tax bill

The loss cancels out capital gains with no dollar limit. Anything left over can offset up to $3,000 of ordinary income a year, while the rest carries forward.

When a holding falls below its cost basis (what you originally paid), you sell to realize the loss, then reinvest the proceeds in a similar but not substantially identical investment so your market exposure never breaks. The realized loss offsets capital gains elsewhere in your portfolio, reducing the tax you owe on them.

A quick example

Suppose a client's fund has fallen $15,000 below its cost basis, and earlier in the year they realized $15,000 of gains on something else. Selling the fund banks a $15,000 loss that cancels the gain, erasing the tax on it. The proceeds move straight into a comparable fund, so the client stays fully invested. What changed is the tax bill, not the market exposure.

The wash-sale rule

One rule governs the replacement. The IRS disallows the loss if you buy the same or a substantially identical security within 30 days before or after the sale; this is the wash-sale rule. Using a comparable but not identical replacement is what keeps the loss deductible while keeping you invested.

Offsets and carryforwards

A harvested loss is applied in a set order: first against capital gains of the same type (short-term losses offset short-term gains, long-term offset long-term), then against gains of the other type, then against up to $3,000 of ordinary income a year.

Whatever is left carries forward to future years and works through the same order again.

How often to harvest

Harvesting is often treated as a year-end task, but the opportunity doesn’t wait for December. Say a stock drops in March and has recovered by year-end: a December-only review finds no loss to take, because it has already come and gone.

Harvest during the March dip instead and the loss is banked, while a similar replacement holding rides the recovery. The temporary dip becomes a permanent tax saving.

This is why automated, ongoing harvesting tends to gather more usable losses than a once-a-year sweep. Vise, for example, checks for harvestable losses daily, and treats routine account events like deposits, withdrawals, and dividend reinvestment as harvesting opportunities rather than waiting for a scheduled review.

Tax Loss Harvesting and Direct Indexing

Harvesting works best when there are many individual positions to draw losses from. That's why it pairs naturally with Direct Indexing, where a client owns the individual stocks of an index instead of a single fund share. Even in an up market, some stocks will stay down, and each one is a candidate to harvest.

When it makes sense

The benefit scales with your tax situation. It's most valuable for investors in higher brackets, in taxable accounts, with realized gains to offset. It does nothing in an IRA or 401(k), which are already tax-sheltered. Consistent harvesting is also a core contributor to tax alpha, the after-tax return that tax-smart management adds.

Limits and risks

Tax Loss Harvesting has two caveats. Harvesting defers tax rather than eliminating it: the replacement holding carries a lower cost basis, so a larger gain may surface when it's eventually sold. And trading purely to harvest can add costs and clutter a portfolio. Done systematically, with the wash-sale rule respected, small losses banked over time can compound into a real after-tax edge.

How Vise approaches Tax Loss Harvesting

Vise, a portfolio management platform for financial advisors, builds harvesting directly into its Direct Indexing portfolios and tax-aware Long/Short strategy, rather than running it as a separate, scheduled event. Three things distinguish the approach:

Harvesting is part of every trade decision

Vise’s optimizer weighs harvestable losses alongside tracking error, risk, and trading costs in a single calculation, so a deposit, withdrawal, or rebalance doubles as a harvesting opportunity.

Wash-sale checks across the whole household

Before any trade, Vise screens for wash sales across every account sharing the client’s tax ID—not just the account being traded—, so a purchase in one account doesn’t silently disallow a loss taken in another.

Replacements protect the portfolio, not just the position

The optimizer doesn’t swap each sold holding one-for-one; it chooses replacements so the whole portfolio keeps its sector balance and stays close to its index. And nothing it buys will trip the wash-sale rule.

How much difference does this make? The gain from harvesting shows up as tax alpha the extra after-tax return that tax-aware management adds. It scales with the two ideas on this page: review more often and you catch dips an infrequent review misses, and give the portfolio more positions that can show a loss and there is more to catch.

That second lever is why a long-short strategy raises the ceiling: its short positions fall when markets rise, supplying harvestable losses in exactly the years when a long-only portfolio has few.

10-year average tax alpha; assumes a UHNW investor, quarterly contributions, and that all harvested losses can be used to offset taxes. Source: Khang, Cummings, Paradise & O’Connor (2022). Long Short tiers reflect Vise backtested simulations; past performance is not indicative of future results.

The longest bars combine both levers: harvesting daily, on both sides of the market. Vise is built on that combination, designed to catch every harvesting opportunity the market offers.

See how Vise harvests losses continuously across its Direct Indexing portfolios, not just at year-end.

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1 Vise "Platform Assets" encompasses assets actively managed by Vise as well as assets that Vise aggregates, monitors, and uses to generate customized proposals. As of 6/1/2026.
2 This calculation is based on total realized losses as of 12/15/25 and assumes a long-term capital gains tax rate of 20% and a short-term capital gains tax rate of 41%.
3 Source: Cerulli Associates, U.S. Asset and Wealth Management Edition, 2021

Images and graphs on this page are for illustrative purposes only. Does not represent actual client results. Past performance does not guarantee future results.

Tax-Loss Harvesting Disclosures

Vise AI Advisors, LLC (“Vise”) is an SEC-registered investment adviser. The material presented is for informational purposes only and should not be construed as investment advice. It is not a recommendation of, or an offer to sell or solicitation of an offer to buy, any particular security, strategy, or investment product. Nothing on this website should be construed as personalized investment advice, which can only be provided in one-on-one communications.

Investing in securities involves risks, including the potential loss of money, and past performance does not guarantee future results. Historical returns, expected returns, and probability projections are provided for informational and illustrative purposes and may not reflect actual future performance.

Product images shown are for informational and illustrative purposes only and may not reflect how they will appear within the product. Third-party trademarks and service marks referenced are the property of their respective owners.

The portfolio built
for your biggest client.
For every client.

Book a Demo

Product

Resources

521 Broadway
New York, NY 10012

+1 646 374 0888

Form ADV

Form CRS

Images and graphs on this page are for illustrative purposes only. Does not represent actual client results. Past performance does not guarantee future results.

Tax-Loss Harvesting Disclosures

The portfolio built for your biggest client.
For every client.

Book a Demo

Product

Resources

521 Broadway
New York, NY 10012

+1 646 374 0888

Form ADV

Form CRS

Images and graphs on this page are for illustrative purposes only. Does not represent actual client results. Past performance does not guarantee future results.

Tax-Loss Harvesting Disclosures

What is Tax-Loss Harvesting?

How Tax Loss Harvesting works

Spot a Loss

Harvest it

Stay invested

Lower the tax bill

A quick example

The wash-sale rule

Offsets and carryforwards

How often to harvest

Tax Loss Harvesting and Direct Indexing

When it makes sense

Limits and risks

How Vise approaches Tax Loss Harvesting

Harvesting is part of every trade decision

Wash-sale checks across the whole household

Replacements protect the portfolio, not just the position

See how Vise harvests losses continuously across its Direct Indexing portfolios, not just at year-end.

The portfolio built for your biggest client.For every client.

The portfolio builtfor your biggest client.For every client.

The portfolio built for your biggest client.For every client.

The portfolio built for your biggest client.
For every client.

The portfolio built
for your biggest client.
For every client.

The portfolio built for your biggest client.
For every client.