Tax-Loss Harvesting
Selling an investment that is down locks in a capital loss you can use against gains, plus up to $3,000 a year of ordinary income. Unused losses carry forward with no expiration. Like pruning dead branches in winter, it clears what is not growing so the rest can. Done right, it can keep thousands of dollars in your account in a year with large gains.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed October 9, 2026
Who it fits
- Investors with taxable brokerage accounts holding positions below cost.
- Owners with large gains this year from a sale of stock, property or a business interest.
- High earners subject to the 3.8% net investment income tax.
- Investors willing to replace a sold position with a similar but not identical one.
Who it's not for
- Holdings inside IRAs and 401(k)s. Losses there have no tax effect.
- Investors in the 0% long-term capital gains bracket, where offsetting gains saves little.
- Anyone who would sell a position they believe in only for the deduction and cannot replace the exposure.
How it works
When you sell at a loss, the loss first offsets capital gains of the same type, then the other type. Net losses then offset up to $3,000 of ordinary income ($1,500 if married filing separately). The rest carries forward to future years.
Short-term gains are taxed at ordinary rates, so losses used against them are worth the most.
The wash-sale rule disallows the loss if you buy substantially identical stock or securities within 30 days before or after the sale. The disallowed loss is added to the basis of the new shares, so it is postponed, not lost. A purchase in your IRA also triggers it.
Investors stay in the market by buying a similar fund that tracks a different index, or by waiting 31 days.
Harvesting lowers your basis, so it defers tax rather than erasing it. The deferral has real value, and if you hold until death, heirs receive a stepped-up basis.
Illustrative example
Illustrative: a married couple filing jointly, in the 35% bracket and above the NIIT threshold, realized $50,000 of long-term gains this year. They harvest $60,000 of long-term losses and replace the positions with similar funds.
- Net capital position: $50,000 gains - $60,000 losses = -$10,000.
- Gains offset: $50,000 x (15% + 3.8%) = $9,400 of tax avoided this year.
- Ordinary income offset: $3,000 x 35% = $1,050.
- Loss carried forward: $10,000 - $3,000 = $7,000.
- Total federal tax kept this year: $9,400 + $1,050 = $10,450.
About $10,450 of federal tax stays invested this year, with $7,000 of losses carried forward.
The rules
| Rule | Citation |
|---|---|
| Capital losses offset capital gains, plus up to $3,000 of other income ($1,500 married filing separately). | IRC §1211(b) |
| Unused capital losses carry forward indefinitely for individuals. | IRC §1212(b) |
| Losses are disallowed if substantially identical stock or securities are bought within 30 days before or after the sale. | IRC §1091(a) |
| The disallowed loss is added to the basis of the replacement shares. | IRC §1091(d) |
| Buying the same security in your IRA within the window triggers a wash sale, and the loss is not added to IRA basis. | Rev. Rul. 2008-5 |
Watch-outs
- Automatic dividend reinvestment can buy shares within the 30-day window and trigger a partial wash sale.
- A spouse's purchase in their own account can trigger the rule.
- Broker 1099-B forms track wash sales only within the same account. Purchases elsewhere are your responsibility to report.
- Do not let tax drive the investment. A poor replacement can cost more than the tax saved.
What we do
We project your gains for the year, identify how much harvesting is useful, and coordinate timing with your investment advisor. We reconcile the 1099-Bs across accounts, check for wash sales the broker could not see, and track carryforwards on the return.
Questions
When should I harvest losses?
Any time a position is down, not just in December. Market drops mid-year often create the best opportunities.
What counts as substantially identical?
The same stock or fund is. Two funds tracking different indexes are generally treated as not identical, but there is no bright-line test. We document the replacement choice.
Do carried-forward losses expire?
Not for individuals during life. They end at death, so they should be used while you are living.