Tax-loss harvesting is the practice of selling an investment that has declined in value to realize a capital loss, which can then be used to offset capital gains in your portfolio — or up to $3,000 of ordinary income per year. Any losses beyond what you use in a given year carry forward indefinitely to offset future gains. The sold position is typically replaced with a similar investment to maintain your target asset allocation and market exposure. For Seattle investors, this strategy works entirely at the federal level since Washington has no state income tax, but the federal savings can be significant — particularly for high-income earners with substantial taxable accounts.

Tax-loss harvesting is most valuable for investors with taxable brokerage accounts who are in the 22% federal tax bracket or higher. It's especially impactful for Seattle tech employees at Microsoft, Amazon, Google, Apple, Meta, or Boeing who regularly receive RSUs, ESPP income, or stock option proceeds that generate taxable gains. Investors in or near retirement with significant taxable portfolios, those undergoing Roth conversions, or anyone managing a concentrated stock position also benefit substantially. The strategy has limited value inside IRAs and 401(k)s, where gains and losses don't carry direct tax consequences.

The wash sale rule is an IRS regulation that disallows a tax loss if you repurchase the same — or a "substantially identical" — security within 30 days before or after the sale. For example, if you sell an S&P 500 index fund at a loss and immediately repurchase the same fund, the IRS disallows the loss. To stay compliant, investors typically replace the sold position with a similar but distinct fund — such as switching from one S&P 500 ETF to a total market ETF — to maintain market exposure without triggering the rule. The rule applies across all accounts you own, including IRAs, so coordination across your full portfolio is essential.

The savings depend on your tax bracket, the size of the losses harvested, and how those losses are applied. In the 32% federal bracket, a $50,000 harvested loss applied against short-term gains saves $16,000 in federal taxes in that year alone. For Seattle investors at Microsoft or Amazon with significant RSU income pushing them into the top brackets, the savings from systematic annual harvesting can add hundreds of thousands of dollars to after-tax wealth over a full investment career. The strategy also reduces Medicare IRMAA surcharges and keeps more assets compounding rather than being sent to the IRS.

No — tax-loss harvesting only applies to taxable brokerage accounts. Inside traditional IRAs, 401(k)s, and similar tax-deferred accounts, gains and losses have no immediate tax consequence because you don't pay taxes on those transactions until withdrawal. In Roth accounts, qualified withdrawals are tax-free, so capital losses inside those accounts also don't generate deductible losses. The strategy is exclusively a taxable account tool, which is why coordinating your taxable and tax-advantaged accounts with an advisor is so valuable — it clarifies exactly where harvesting opportunities exist.