Tax-Loss Harvesting: The Free Lunch of Investing
How It Works
Tax-loss harvesting is the practice of selling securities at a loss to offset capital gains, while immediately reinvesting in a similar (but not substantially identical) security to maintain market exposure. When done systematically, it generates real after-tax value.
The Rules
The IRS wash sale rule prohibits buying a "substantially identical" security within 30 days before or after the sale. This means you need a replacement security that tracks the same market exposure without being identical.
Common Swap Pairs
| Sell (Harvest Loss) | Buy (Replacement) | Correlation |
|---|---|---|
| VOO (S&P 500) | IVV (S&P 500) | 0.999 |
| VTI (Total Market) | ITOT (Total Market) | 0.999 |
| VXUS (Int'l) | IXUS (Int'l) | 0.998 |
| BND (US Bonds) | AGG (US Bonds) | 0.997 |