How does tax-loss harvesting work, and what is the $3,000 limit?

Tax-loss harvesting means selling investments that have dropped below your purchase price to realize a capital loss, which you use to offset capital gains and reduce taxes. Losses first cancel out gains of the same type (short-term against short-term, long-term against long-term), then any excess offsets the other type. If you still have leftover net losses after wiping out all gains, you can deduct up to $3,000 per year against ordinary income like your salary – $1,500 if married filing separately. Anything beyond that carries forward indefinitely to future years. The strategy is most valuable in taxable brokerage accounts during down markets; it does nothing in IRAs or 401(k)s. Just respect the wash-sale rule by avoiding repurchasing the same security within 30 days. Model the impact at wealthserene.com/tools/tax-strategies.