Tax-loss harvesting means selling an investment that has lost value, banking the loss against your capital gains, and replacing it with a similar investment so your market exposure barely changes. It’s one of the few genuinely free-money strategies left — when it applies. (Crypto has its own rules and is covered separately in our crypto tax-loss harvesting guide.)
How It Works
- Sell positions sitting below your cost basis.
- Use the losses to offset capital gains from other sales.
- Pay tax only on the net gain.
- Reinvest in a similar (not identical) holding to stay invested.
Worked Example: A Taxable Brokerage Account
A £100,000 portfolio with two losing positions and one realised gain this tax year.
| Position | Cost basis | Current value | Gain / (loss) |
|---|---|---|---|
| Global equity ETF | £40,000 | £36,000 | (£4,000) |
| US tech stock | £20,000 | £16,500 | (£3,500) |
| UK small-cap stock (sold) | £15,000 | £21,000 | £6,000 |
Without harvesting, you’d pay capital gains tax on £6,000 of gains. After selling the two losers, the net gain is £6,000 − £7,500 = £1,500 loss. At a 20% tax rate you’ve removed £1,500 of taxable gains from the year — and in the UK the unused loss carries forward indefinitely.
The key point: you sold and reinvested in replacements, so your market exposure is unchanged. Only the tax position improved.
The US Wash-Sale Rule in Detail
| Element | Rule |
|---|---|
| Window | 30 days before and 30 days after the sale |
| Trigger | Buying a “substantially identical” security within that window |
| Penalty | The loss is disallowed (added to the replacement’s cost basis) |
| Workaround | Buy a different but similar fund (S&P 500 → total market; one sector ETF → another) |
The window is wider than most people think — 61 days in total, because the 30 days before the sale also count. This is why December harvesting can backfire if you re-bought the same fund in late November.
The UK Rules
| Rule | Details |
|---|---|
| Annual exemption | £3,000 of gains tax-free per year (2026/27) |
| Same-day rule | Same-day purchases are matched to sales first |
| 30-day rule | Repurchasing within 30 days means the loss is not allowed |
| Carry forward | Losses carry forward indefinitely against future gains |
The practical UK workaround: if you want to stay invested, switch to a different fund family or index rather than rebuying the same ETF within 30 days.
Combining With Asset Allocation
Harvesting and rebalancing are natural partners — both require selling.
| Scenario | Combined move |
|---|---|
| Rebalancing a taxable account anyway | Sell losers (harvest) instead of winners (pay tax) |
| A holding is above target | Harvest in the replacement fund instead |
| A big index loss | Swap index funds (FTSE All-World → MSCI World) and keep exposure |
Replacement pairs that keep your allocation roughly intact:
| You sold | Buy instead |
|---|---|
| S&P 500 ETF | Total US market ETF |
| FTSE All-World ETF | MSCI World + EM ETF |
| Growth index | Value index |
| Global bonds fund | Global bonds ex-credit fund |
When Harvesting Is NOT Worth It
| Situation | Why to skip |
|---|---|
| Loss under ~£500 / $1,000 | Fees and effort exceed the tax saved |
| You’ll rebuy the same fund within 30 days | Wash-sale / 30-day rule disallows it |
| Inside an ISA / SIPP / 401(k) | No capital gains tax to offset — nothing to harvest |
| A low tax year | Gains may fall inside your annual allowance anyway |
| You’ll sell the position again soon | Avoid a double sale (sell, rebuy, sell) |
Software and Tools
| Tool | What it does | Cost |
|---|---|---|
| Broker statements (all brokers) | Cost basis and realised-gain reports | Included |
| Tax software (TurboTax, TaxScouts, FreeAgent) | Auto-imports and computes harvesting | £30–£100 |
| Portfolio trackers (Sharesight, Portfolio Performance) | Continuous gain/loss tracking | Free tier / paid |
| HMRC records (UK) | Track gains and losses manually | Free |
Bottom Line
For stock and ETF investors, tax-loss harvesting is a real, repeatable saving — but only in taxable accounts, only when losses are meaningful, and only when you respect the wash-sale and 30-day rules. Pair it with rebalancing to sell losers instead of winners, use replacement funds to stay invested, and skip it when the loss is too small to matter. The savings compound year after year.