Tax Loss Harvesting Basics

Tax loss harvesting means selling investments at a realized loss to offset realized capital gains (and up to limited ordinary income), then often reinvesting in a similar but not identical exposure. It is a tax timing tactic, not a free profit.

This guide covers why investors harvest, how options losses fit, and pitfalls that erase the benefit.

Why harvest?

In a taxable account, net capital losses can reduce tax on net capital gains for the year. Excess losses may carry forward to future years subject to limits.

Example (simplified): You realized $10,000 short-term stock gains and hold another stock with a $10,000 unrealized loss. Selling the loser before year-end may net to roughly zero taxable short-term gain, depending on basis, holding period, and wash rules.

You still lost economic value on the loser; you only reduced tax on gains elsewhere.

Realized vs unrealized

Term	Tax relevance
Unrealized loss	Position is down on paper; no tax event yet
Realized loss	You closed the position at a loss; may report on Schedule D

ThetaViz mark-to-market on saved strategies is not harvesting until you close at the broker.

Options harvesting

Closing a losing long call or long put realizes a capital loss (usually). Buying back a losing short position may also realize a loss if you paid more to close than premium received.

Watch character: short-term losses offset short-term gains first in the netting process. A long-term stock gain is not automatically offset by a short-term option loss in the first netting step.

Expired long options worthless at expiry are often treated as sales for tax reporting with loss equal to premium paid, confirm on your 1099-B.

Wash sale trap

If you sell stock at a loss and buy substantially identical shares within 30 days before or after, the loss may be deferred under US wash sale rules. Some option trades on the same underlying count.

Read Wash sale rule basics before swapping SPY for SPY 31 days later.

Substitute investments

Investors sometimes sell ETF A at a loss and buy ETF B with similar sector exposure to stay invested while avoiding a wash. Similarity is a facts-and-circumstances question; not every pair is safe.

Costs that eat harvesting

• Bid-ask spread on options
• Commissions
• Market impact on large positions
• Opportunity cost if the sold asset rebounds before you re-enter
• Portfolio drift from your target allocation

A $500 tax benefit helps less if you spent $400 in friction and gave up a rebound you wanted.

Do not let taxes drive all risk

Harvesting a losing short put by taking assignment piles stock risk on your books. Harvesting a spread leg without closing the other leaves naked exposure.

Risk and thesis come first. Tax savings are secondary.

Year-end timing

December is busy. Brokers process late trades into next year’s 1099 if settlement crosses tax years. Know trade vs settlement date rules for your situation.

IRA note

Realizing losses inside a traditional IRA generally does not create current-year Schedule D losses you can use against taxable account gains. Loss harvesting is mainly a taxable account topic.

Worked example: stock loss offsets option gain

Taxable year simplified:

• Sold stock at $3,000 long-term gain.
• Closed losing long put for $2,500 short-term loss.

Netting rules apply in steps on Schedule D. Short-term losses first offset short-term gains. Excess may offset long-term depending on rules that year. Software or a CPA handles ordering.

Worked example: harvesting with a substitute

You sell ETF ABC at a $1,000 loss on Dec 1. You buy similar ETF XYZ same day to stay invested.

• If XYZ is not substantially identical, loss may be allowed now.
• If you buy ABC again Dec 20, wash sale may defer the loss.

Document intent and tickers.

Holding period and harvesting

Selling a loser you held 400 days realizes long-term loss character. Selling a winner at 200 days may be short-term gain. Harvest pairs should consider both amount and character.

Options-specific traps

Harvesting stock loss while short calls remain open can create wash or straddle complexity. Closing options first or waiting 31 days may be cleaner. Get advice on non-trivial books.

State taxes

Federal harvesting logic does not automatically match state rules. Some states do not conform to federal wash sale treatment. Ask a CPA in high-tax states.

Donating appreciated stock instead

Some taxpayers donate winners to charity instead of harvesting losers. Different strategy, same need for professional planning.

Related guides

• Wash sale rule basics
• Short-term vs long-term capital gains
• Options and stock taxes overview

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ThetaViz provides educational tools only. This guide is not investment, tax, or legal advice. Prices, margin requirements, and tax rules change. Confirm details with your broker and qualified professionals before trading.