The Loss Bank

How this works

The whole idea, from the beginning

The calculator above compresses a lot of tax law into a few bars. This is the long version — what tax-loss harvesting actually is, why it works, and what every number up there is assuming.

1. The move

Suppose you own 100 stocks. On any given day, some are up and some are down. You paid $5,000 for one of them; today it is worth $4,200.

You sell it — and immediately buy a similar stock with the money. Your portfolio barely changes: you still own the same slice of the market. But your tax return now carries an $800 realized loss. You didn't lose money by selling. The loss already existed — you just made it official, while staying invested.

That's the entire move. Everything else is doing it patiently, hundreds of times, for years.

2. Why a loss is worth money

Realized losses cancel realized gains, dollar for dollar. Sell shares later at a $240,000 profit and the IRS taxes that profit — unless you have $240,000 of banked losses, in which case the taxable gain is zero, and so is the tax. Selling 25,000 shares at $10.60 brings in $265,000, but only the $240,000 above what you paid is gain — the rest is your own money coming back.

Two rules make the bank worth building early:

1. Losses never expire. Whatever you don't use carries forward, year after year, until you have a gain to spend it on.
2. $3,000 a year comes off your salary. While the bank waits, the IRS lets up to $3,000 of it offset ordinary income every year — a small annual dividend for holding the losses.

3. Why 500 stocks instead of one fund

If you own a single S&P 500 fund, you own one position. In a year the market rises 20%, that position is up — there is nothing to harvest. But the average is hiding the parts: inside that same year, maybe 150 of the 500 companies fell.

Owning the stocks individually — called direct indexing — turns one un-harvestable position into five hundred chances. The portfolio still tracks the index. The tax return sees every loser.

4. Fresh money harvests best — and portfolios get locked in

Here is the part most explanations skip, and the reason the chart above is shaped the way it is.

When you harvest that $5,000 stock at $4,200, you rebuy at $4,200 — which means the price you paid resets lower. For that position to hand you another loss, it now has to fall below $4,200. Each harvest makes the next one harder.

Let a portfolio sit while the market grows, and everything in it eventually floats far above what you paid. Nothing is underwater; there is nothing left to sell at a loss. The industry calls this locked in — and it is why harvesting is famously front-loaded: research puts a lump sum's total harvest near 30% of the money invested over ten years, most of it in the first few, fading toward nothing as the portfolio locks up.

New money is the antidote. Every fresh deposit arrives at today's prices with room to fall. You can see both halves in the bars above: the opening deposit harvests hard for a few years and then goes quiet as it locks in, while the monthly contributions hold a steady harvest, year after year, for as long as they keep coming. A lump sum starts the bank; only new money keeps it filling.

5. What happens when you sell

The dashed line on the chart is the sale — a tender offer, in this page's story. The profit on your shares becomes a capital gain, and the bank finally goes to work: every banked dollar cancels a dollar of gain. If the bank is bigger than the gain, the tax is zero and the leftover keeps waiting for your next gain. You can watch the bar drop in the sale year — that is the bank being spent.

6. What the calculator assumes

Real harvests depend on how bumpy the market is, so the volatility slider sets how hard fresh money harvests in its first year — roughly its own value, so a market with 15% swings harvests about 15% of each new dollar — fading as each dollar ages and locks in, calibrated so a lump sum lands near the published ten-year figure. A bumpy market is good for harvesting and bad for growth. Growth itself stays at the S&P 500's long-run average — about 10% a year — rather than asking you to guess it.

Taxes use 2026 federal brackets, the net investment income tax, and your state's rates — full brackets for California and New York, top rates elsewhere, and Washington's capital-gains excise handled as the standalone tax it is. It is an illustration, not advice: run the real numbers before you act.