What Is a Tax-Loss Harvesting?

Tax-loss harvesting turns investment losses into a tangible tax benefit. Rather than simply waiting for a losing investment to recover, you realize the loss, capture the tax deduction, and reinvest in a similar asset that will participate in any subsequent recovery. Over a multi-decade retirement, systematic tax-loss harvesting can add meaningful after-tax value to a portfolio.

For Arizona retirees, harvested losses offset both federal and state capital gains. Because Arizona taxes all income at 2.5%, harvested losses provide a 2.5% state tax benefit in addition to federal savings — smaller than the federal benefit but still meaningful over time.

Step 1: Identify losses. Review your taxable (non-retirement) investment accounts for holdings with unrealized losses.

Step 2: Sell the losing position. This realizes the loss for tax purposes.

Step 3: Reinvest in a similar asset. To maintain your portfolio allocation and market exposure, buy a similar but not identical investment. For example, sell a Vanguard S&P 500 fund at a loss and buy a Schwab S&P 500 fund — or sell an S&P 500 fund and buy a total stock market fund.

Step 4: Use the loss. - Losses first offset capital gains dollar-for-dollar (short-term losses offset short-term gains first, then long-term) - Remaining losses offset up to $3,000 of ordinary income per year - Unused losses carry forward indefinitely to future tax years

The wash sale rule: You cannot repurchase the same or substantially identical security within 30 days (before or after the sale). Violating this rule disallows the loss. The rule applies across all your accounts — including IRAs and your spouse's accounts.

Important limitations: - Only applies to taxable accounts (not IRAs, 401(k)s, or other tax-deferred accounts) - Transaction costs and tracking complexity should be weighed against the tax benefit - Harvesting resets your cost basis to the lower purchase price, potentially creating a larger gain later (though this is often deferred for years or eliminated through step-up in basis at death)

Arizona taxes capital gains as ordinary income at the 2.5% flat rate. Tax-loss harvesting provides both federal and state benefits for Arizona residents with taxable investment accounts. Because Arizona's rate is low, the primary benefit comes from the federal tax savings — but the state savings add up over time, especially for retirees with large taxable portfolios.