If you hold a taxable brokerage account, tax-loss harvesting is one of the easiest year-end moves available. The strategy: sell positions trading below your basis, capture the loss for tax purposes, then redeploy the cash — often into a similar (but not identical) holding to maintain market exposure. Here’s how it works without falling into the wash sale trap.
The basic mechanic
You bought XYZ at $100/share, it’s now $70/share. If you sell at $70, you realize a $30/share capital loss. That loss:
- Offsets capital gains dollar-for-dollar
- If you have more losses than gains, up to $3,000/year of net losses offset ordinary income
- Anything beyond carries forward indefinitely
For Houston households with W-2 plus brokerage activity, harvesting losses against gains can save 15-23.8% federal capital gains tax. For high earners with NIIT, even more.
The wash sale rule
Here’s the catch. The IRS doesn’t let you sell a position at a loss and immediately rebuy it. The wash sale rule disallows the loss if you buy “substantially identical” securities within 30 days before or after the loss sale.
Trip the rule and the loss is added to the basis of the new shares (preserved, just deferred to a future sale). Not the end of the world — but it kills your current-year benefit.
What counts as substantially identical
- The same stock or ETF: clearly disallowed
- Different share classes of the same company: typically disallowed
- Different ETFs tracking the same index: gray area but the IRS often considers them substantially identical
- Different ETFs tracking similar but distinct indexes (e.g., S&P 500 vs Total Market): generally OK
- Stock vs bonds of the same company: not substantially identical
The clean swap strategy
To harvest losses without losing market exposure, swap one ETF for a similar-but-not-identical one:
- VTI → ITOT (Vanguard total market → iShares total market)
- VOO → SPLG (Vanguard S&P 500 → SPDR S&P 500)
- VTV → SCHV (Vanguard value → Schwab value)
You stay invested in essentially the same exposure but the IRS won’t consider them substantially identical because they track technically different indexes.
Common Houston mistakes
- Selling in December and rebuying in January. 30-day window straddles year-end — January rebuy still triggers wash sale.
- Spouse triggering the wash sale. If your spouse buys the same security in their account within 30 days, you trip the rule. Coordinate.
- IRA rebuy. If you sell at a loss in your taxable account and rebuy in your IRA, you trip the rule AND lose the loss permanently (it doesn’t add to IRA basis).
- Dividend reinvestment. A 4-cent reinvestment within 30 days of a loss sale triggers the rule on those shares. Turn off DRIP before harvesting.
Cryptocurrency wash sale rules
Currently, the wash sale rule does NOT apply to cryptocurrency. You can sell Bitcoin at a loss and immediately rebuy it. This is a quirk of the code that may close in future legislation but as of 2026, it remains. Crypto investors holding underwater positions in a taxable wallet can use this freely.
When to harvest
- Year-end (December) is the natural time, while you can still see the year’s gains/losses
- Any time during the year if you have a major taxable event (business sale, large stock sale, RSU vesting)
- Continuous harvesting during volatile markets — some robo-advisors do this automatically
Houston-specific consideration
Texas has no state capital gains tax, so harvesting only saves federal. But that still means 15-23.8% (long-term) or 32-37%+ (short-term) for high earners. Worth the effort.
The bottom line
Tax-loss harvesting is the rare strategy that actually puts money in your pocket without changing your underlying portfolio meaningfully. Run it every December. Watch the wash sale window. For households with material brokerage holdings, this is $1,000-$10,000/year in real tax savings.
To coordinate harvesting with the rest of your tax picture, call (832) 594-0339 or contact us. We integrate this with annual tax planning for clients with brokerage portfolios.