Free The Bogleheads' Guide to Retirement Planning by Taylor Larimore, Richard A. Ferri, Mel Lindauer, Laura F. Dogu, John C. Bogle Page A

money market fund or invest it in a similar, but not identical fund. This has the effect of booking a $4,000 capital loss, while returning you to your original position 31 days later.
    The capital loss is valuable in several ways. Before you pay any capital gains taxes each year, you use your capital losses to offset any capital gains, and you pay taxes only if you have more gains than losses. If you have more losses than gains, you can apply up to $3,000 of your remaining capital losses against your regular income. And whatever capital losses are still left over (in this case, $1,000, which is the $4,000 in losses minus the $3,000 deduction) can be carried forward indefinitely into future years. Each year, you get to first apply the carried-forward losses against capital gains and then use any remainder (up to $3,000) to reduce your ordinary income.
    Using tax loss harvesting to offset capital gains doesn’t actually eliminate the capital gains taxes you would have paid. Instead, it defers those taxes into the future. (In our example, you will owe more capital gains taxes in the future because you bought back the fund at a cost basis that is $4,000 lower.) However, because future money is worth less than money today, there’s a saying in public finance that a tax deferred is a tax avoided. Using tax loss harvesting to defer capital gains taxes is like receiving an interest-free loan from the IRS. Also, if you (and your spouse) are still holding the shares when you die, your heirs will receive a stepped-up basis, and you will have gotten the up-front benefit from tax loss harvesting while avoiding the taxes on the back end entirely. Finally, the extra capital gains you owe in the (possibly distant) future will be at the (lower) capital gains rate, while the benefit you receive today of the $3,000 deduction is at your (higher) marginal income tax rate.
Avoiding Wash Sales
    If you buy the same security that you sold at a loss within 31 days, the IRS considers it to be a wash sale, and you will not be able to claim the tax loss. Even if you buy a security that is, according to tax law, substantially identical within 31 days, the IRS considers that to be a tax wash. For example, if you buy options on a stock to replicate the action of a stock you sold, the IRS sees this as a synthetic security that is substantially identical to the stock, and the loss will be disallowed. The IRS also counts wash sales across accounts, so you cannot sell a fund from your IRA and buy the identical fund in your joint taxable account.
    The IRS has not defined substantially identical very well, but there are some reasonable guidelines to follow. The stock of one issuer isn’t substantially identical to stock of a different issuer, even if they are in the same industry. For example, Dell Computer (Ticker: DELL) isn’t substantially identical to Hewlett-Packard (Ticker: HP). If you have a loss on one of these companies, you can buy the other one without having a wash sale. However, an index fund that tracks the S&P 500 Index may be found to be substantially identical to another index fund that tracks the S&P 500 even though different fund companies manage the two funds.
    It is probably fine to move between funds that track different indexes, such as Vanguard Total Stock Market and Vanguard Large Cap Index. These funds track different indexes, but the returns are similar, so they are good alternatives for domestic holdings. Vanguard Total International Stock Market and Vanguard FTSE All-World ex-US also have similar performance while tracking different indexes.
    If you hold ETFs, iShares Dow Jones U.S. Index (Ticker: IYY) is a good substitute for Vanguard Total Stock Market ETF (Ticker: VTI), and SPDR MSCI ACWI ex-US (Ticker: CWI) is a good substitute for Vanguard FTSE All-World ex-US ETF (Ticker: VEU). These non-Vanguard ETFs have higher expense ratios and track different indexes than Vanguard ETFs, but their performance should be nearly identical to