Quick Answer
Tax-loss harvesting means selling a losing investment to realize the loss on paper, then immediately buying a similar (not identical) fund to stay invested. The realized loss offsets capital gains on your tax return, reducing what you owe. ITIN holders with taxable brokerage accounts at Fidelity or Schwab can use this strategy; the wash-sale rule prohibits buying back the identical fund within 30 days.
How Does Tax-Loss Harvesting Work?
Tax-loss harvesting works by selling a losing investment to offset taxable gains in a brokerage account. ITIN holders pay about $8,889 per person per year in taxes (ITEP) — harvesting losses is one of the few legal ways to reduce that bill. If you have a $2,000 gain on Fund B, selling Fund A at a $2,000 loss cancels it, dropping your capital gains tax to $0 for the year.
The strategy: Sell a *different* investment that's currently in a loss. That loss offsets (reduces) your taxable gains.
Example: You bought 100 shares of Fund A at $100/share ($10,000 total). It's now worth $8,000. You also own Fund B (purchased at $5,000, now worth $7,000 — a $2,000 gain). Sell Fund A at a $2,000 loss. That loss cancels out the $2,000 gain from Fund B. Your net capital gain for the year: $0. You owe $0 in capital gains taxes.
What Is the Wash-Sale Rule?
The wash-sale rule disallows your loss if you buy a substantially identical security within 30 days before or after the sale, creating a 61-day window where the rule applies. You can't immediately buy back the same stock, mutual fund, or ETF — and the rule also applies across both spouses' accounts.
The IRS explains the wash-sale rule in Publication 550.
The rule: If you sell a security at a loss and buy a substantially identical one within 30 days *before or after* the sale, the loss is disallowed. This creates a 61-day total "window" where the rule applies.
What counts as "substantially identical"?
- The same stock (yes, the exact same company shares)
- The exact same mutual fund or ETF
- A call option on the same stock
What does NOT trigger the wash-sale rule:
- Buying a *different* index fund. If you sell the S&P 500 fund at a loss, you can immediately buy a Total Stock Market fund.
- Buying a similar but not identical fund in the same category.
- Your spouse buying the same security (wash-sale rules apply across both spouses' accounts).
How Do I Avoid Triggering the Wash-Sale Rule?
You avoid the wash-sale rule by selling a fund at a loss and immediately buying a different, non-identical fund — for example, sell Vanguard's VOO and buy Fidelity's FSKAX. Stay invested for 31 days, then you can switch back. Because VOO and FSKAX aren't substantially identical, the loss stays valid.
Scenario: You own Vanguard S&P 500 ETF (VOO) worth less than you paid and want to stay invested in the U.S. stock market.
Solution: Sell VOO at a loss. Immediately buy a different broad index fund like Fidelity's FSKAX (Total Market Index). Wait 31 days. Then sell FSKAX and buy VOO back.
Result: You harvested the loss, maintained stock market exposure, and avoided the wash-sale rule because VOO and FSKAX are not substantially identical.
When Does Tax-Loss Harvesting Actually Save Money?
Tax-loss harvesting saves money when 3 conditions line up: you have capital gains to offset, those gains are large (think $10,000+ in unrealized gains), and your marginal tax rate is high. In the 22% bracket, harvesting a $5,000 loss saves you about $1,100 in taxes; for lower earners the benefit shrinks.
You have capital gains to offset. The benefit only exists if you sold winners earlier in the year and owe taxes on those gains. Without gains, the loss just carries forward to next year (no benefit today).
Your taxable gains are large. If you're sitting on $10,000+ in unrealized gains across all positions, harvesting losses is worth the effort.
Your marginal tax rate is high. If you're in the 22% or higher tax bracket, harvesting a $5,000 loss saves you $1,100 or more in taxes. For lower earners, the benefit shrinks.
When Is Tax-Loss Harvesting Not Worth the Effort?
Tax-loss harvesting isn't worth the effort when you have no capital gains, when your total gains are under $2,000, or when you're in a low tax bracket. Filers with income under $47,150 see little benefit because their long-term gains may already qualify for the 0% capital gains rate, making the tracking hassle not worthwhile.
You have no capital gains. If you only hold winners (or losses), there's nothing to offset. Your loss carries forward to the next year.
Your taxable gains are small. If your total gains are under $2,000, the tax benefit is small relative to the hassle of tracking wash sales and switching funds.
You're in a low tax bracket. Filers with income under $47,150 (22% bracket and below) see less benefit from harvesting. Your capital gains might qualify for the 0% long-term capital gains rate anyway.
What Should ITIN Holders Know About Tax-Loss Harvesting?
ITIN holders should know 3 things: tax-loss harvesting only applies in taxable brokerage accounts, not a Roth IRA, Traditional IRA, or 401(k); the wash-sale and capital gains rules apply exactly as they do for SSN holders, just using your ITIN on Form 1099; and you should keep your own records of every buy and sell.
Tax-loss harvesting only applies in taxable brokerage accounts. You cannot harvest losses in a Roth IRA, Traditional IRA, or 401(k). Losses in those accounts don't trigger taxes, so harvesting doesn't help.
ITIN holders file taxes like SSN holders. The wash-sale rule and capital gains taxation apply the same way. The only difference is that you use your ITIN number instead of an SSN when filing.
Keep records. Track all buy and sell dates, prices, and fund names. Your brokerage sends tax forms (Form 1099), but having your own records helps if the IRS questions a wash sale.
Frequently Asked Questions
What is tax-loss harvesting?
Selling an investment that is down to realize a capital loss, which offsets capital gains and up to $3,000 of ordinary income per year, lowering your tax bill. You reinvest in a similar — but not "substantially identical" — asset to stay in the market.
What is the wash-sale rule?
If you sell at a loss and buy the same or a substantially identical security within 30 days before or after, the IRS disallows the loss. Avoid it by waiting 31 days or buying a different fund that tracks a similar (not identical) index.
Does tax-loss harvesting help ITIN holders?
It helps anyone with a taxable brokerage account who files a U.S. tax return, including ITIN holders. It does nothing inside a Roth IRA or 401(k), since those accounts are not taxed on gains.
When is it not worth doing?
When the losses are tiny, when you have no gains and little taxable income to offset, or when selling would cost more in fees and complexity than the tax it saves. It is a bonus, not a reason to invest.