Exchange-traded funds (ETFs) can simplify tax-loss harvesting.

• Tax-loss harvesting can turn your portfolio losses into tax breaks.
• The "wash sale rule" is crucial for investors to understand, as it prevents them from receiving a tax break if they purchase "substantially identical" assets within the 30-day period before or after a sale.
• ETFs can help investors avoid the wash sale rule, according to experts.

Although the stock market had a strong year, you may still have portfolio losses. However, experts suggest that you can use down assets to obtain a tax break.

Tax-loss harvesting is a strategy where you sell losing brokerage account assets to claim a loss, which can be used to offset portfolio gains when filing taxes. When your investment losses exceed profits, you can use the excess to reduce regular income by up to $3,000 per year.

According to certified financial planner David Flores Wilson, managing partner at Sincerus Advisory in New York, tax-loss harvesting is a proven method for reducing investors' tax bills.

Investors can offset any additional losses incurred after offsetting $3,000 in regular income by carrying them forward to future years to offset capital gains or income.

Consistently harvesting tax losses throughout the year can significantly benefit investors over time, according to Wilson.

What to know about the wash sale rule

Tax-loss harvesting can be straightforward when you're eager to sell a losing asset. However, it becomes challenging when you still want exposure to that asset due to the IRS guidelines known as the "wash sale rule." This rule prevents you from claiming the tax break on losses if you rebuy a "substantially identical" asset within the 30-day window before or after the sale. In other words, you cannot sell a losing asset to claim a loss and then immediately repurchase the same investment.

How exchange-traded funds can help

ETFs can be used for tax-loss harvesting, as they offer a variety of similar but not identical funds that can be exchanged for a losing one. However, ETFs with identical indexes, such as the S&P 500, will not comply with the wash sale rule and the loss will not be allowed.

The IRS definition of "substantially identical" is not clear-cut and is determined by the specifics of your situation, as stated by the agency.

It's important to consult with an advisor or tax professional before making any changes to your investment plan to avoid violating the wash sale rule.