[MR4D]

Not quite true.

For instance, I could sell my losses in a growth fund only to buy a different growth fund (not the same index though) and I get to stay in the market.

Ideally you would do this on day 364 of losses to maximize the tax incentive.

[djrogers]

It's not a tax incentive though - an incentive encourages you to do something, nobody is encouraged to lose money. Also, if one were to do the above, and the growth fund went up, you'd wind up paying taxes on that gain which would offset the tax deduction you took on the loss when you eventually sold it, whereas you could have just stayed in, waited for it to go back up, and you'd be at a wash.

If someone followed your advice exactly and sold on day 364 vs staying in they'd lose even more, as by the time the initial investment goes back up (after day 365) you'd be in long-term capital gains territory, which is a lower tax rate.

That's why I said it only works in the short term - eventually the gov't is gonna get it's money.

[laurencerowe]

While the benefits are limited, there are advantages:

1. Harvesting your capital losses allows you to offset other gains which may be taxable at an earlier date. $1000 today is worth substantially more than $1000 in 10 years time. 'Tax deferred is tax avoided.'

2. You can offset up to $3000 of losses a year against regular income which is taxed at a higher rate.

For me at least while it seems worthwhile to switch index funds to harvest losses when the market falls substantially the upsides aren't enough to justify the lock in of using something like Betterment's automatic tax loss harvesting features of their platform by having you invest in many individual stocks managed by their roboadvisor rather than an index fund.

[MR4D]

They are encouraging people to sell.

Most people wouldn’t care, but if you’re in a high tax bracket and you can sell one to buy another and keep your risk profile roughly the same, you’ll do it.

People prefer to pay long term gains and take short term losses. The benefits work in your favor and against the govt. The tax code reflects that, and has for a long time.

[hllooo]

it can work if you're offsetting existing short term gains and hold the replacement for >1 year, or if the stock never recovers, in which case you pull forward the deduction