“Tax losses are a potential asset that can lessen the sting of market downturns,” says Joel Dickson, a tax specialist who is global head of advice methodology for Vanguard Group.

The reason: Investors can sell their losers and book a capital loss, typically for the difference between a holding’s purchase price and its sale price. Then they can use these losses to offset taxable capital gains from selling winners, either right away or in the future.

Such losses can shelter gains from a broad range of assets, so losses from the sale of a bond fund, for example, can offset taxable capital gains from the sale of an index fund, cryptocurrency or real estate.

And if an investor doesn’t have enough taxable capital gains, then he or she can deduct up to $3,000 of losses per year against ordinary income such as wages or interest. Unused losses above that carry forward indefinitely for future use, although individual investors can’t carry losses back to offset gains on prior-year asset sales.

Here’s a simplified example. John bought 200

Apple

shares for $15,000 in spring 2020. Then he paid $45,000 for bitcoin in spring 2021. Both holdings are in taxable accounts, and John wants some cash.

At recent prices, John’s Apple stock had a capital gain of about $14,000 and his bitcoin had a loss of about $15,000. If he sells both holdings at those prices, then his bitcoin loss can shelter his gain from selling Apple shares and John won’t owe tax on it. The remaining $1,000 loss can offset other taxable gains or, if he doesn’t have them, $1,000 of ordinary income.

That’s not all: Many investors use the tax code’s rules systematically to sell losers and bank losses for use against future gains while staying invested in the market. This strategy is called tax-loss harvesting.

One seasoned harvester is David Grabiner, a mathematician on the advisory board of Bogleheads.org, a collaborative personal finance website. Mr. Grabiner says he first harvested losses during the 2002 market downturn and has done so ever since, typically when his holdings—which are mostly ultralow-fee index funds and exchange-traded funds—are down about 10%.

Mr. Grabiner says his accumulated losses have repeatedly allowed him to sell winners without owing tax. In 2013, he made a five-figure down payment on a home, and 2017 he bought a car. He also has sheltered $3,000 of wages annually. This year he has harvested losses twice, he says.

“I appreciate that Uncle Sam will share my losses when I have them,” he says.

How much difference can loss harvesting make to an investor’s total returns? Vanguard’s Mr. Dickson has studied this issue in depth and concluded that while returns for individuals vary greatly depending on circumstances, many investors can add between 0.5% and 1.50% a year to total returns by harvesting losses. ​

He says the variables affecting the benefit include fees, market volatility, tax rates and—especially—the amount of gains that can be offset by losses. The higher the investor’s tax rate and gains, the greater the benefit is likely to be.

As with many investing strategies, the devil is in the details, so here’s more to know.

Beware of the ‘wash-sale’ rules on securities.

To prevent investors from gaming the system, the tax code postpones the use of losses if an investor purchases a “substantially identical” security within 30 days before or after selling the loser.

Such transactions are known as wash sales. The delayed use of losses applies to wash sales of stocks, bonds, mutual funds and ETFs, among others. It also applies if the investor sells a loser in a taxable account and then buys it in a retirement plan such as an IRA within 30 days. Stock-option grants and exercises also count as purchases.

To maintain their portfolio, many investors want to stay invested in the holding they’ve sold. In that case, Robert Willens, a CPA and longtime independent tax analyst, advises switching to a similar but not identical holding to catch any rebound during the 30-day period.

As there’s no official guidance, the line between “substantially identical” and “similar” is a judgment call. In Mr. Willens’s judgment, selling an S&P 500 index fund at one firm at a loss and buying an S&P 500 index fund at another wouldn’t pass muster. But switching into a total market fund immediately after selling an S&P 500 index fund at a loss should be OK.

What if the holding is a single stock like

Meta Platforms,

which is down more than 40% this year? The investor shouldn’t repurchase Meta, so Mr. Willens suggests buying an industry peer or focused fund in which Meta is a component but not the dominant holding.

Be aware of the wash-sale exception for cryptocurrency

Because cryptocurrencies aren’t securities, they aren’t subject to the wash-sale rules under current law. Congress has considered changing this status but hasn’t yet.

This means that a bullish crypto investor could harvest capital losses on a holding to offset current or future capital gains and repurchase it right away, according to tax specialists.

Be savvy when deploying losses

Mr. Willens advises investors to take enough capital losses to shelter $3,000 of income such as interest or wages a year. This income is typically taxed at higher rates than long-term capital gains.

Beyond that, the losses’ maximum value typically lies in using them to offset short-term capital gains, which are taxable at the rates for ordinary income.

Investors who make charitable donations should also think twice before selling long-held appreciated assets and using losses to offset the gains. Donating these assets could be more tax-efficient, as in many cases the donor owes no tax on the appreciation and gets a charitable deduction as well.

Watch investment fees

High transaction or advisory fees can quickly erode the value of tax-loss harvesting, so pay attention to them.

Consider life expectancy

Loss harvesting often isn’t appropriate for investors who are likely to die with unused tax losses. Under current law, capital losses expire at death and there’s no capital-gains tax on the appreciation in assets held at death, so there’s no need to shelter those gains.

Write to Laura Saunders at laura.saunders@wsj.com