How tax-loss harvesting works
Harvesting starts with a holding in a taxable brokerage account that is worth less than its cost basis. Selling turns the paper loss into a realized capital loss, reported on Form 8949 and Schedule D; it is long-term if you held the investment more than one year and short-term otherwise.
At year-end the loss is netted with your other capital gains and losses. Short-term losses first offset short-term gains and long-term losses offset long-term gains; a net loss on one side then offsets a net gain on the other. If losses still exceed gains, up to $3,000 reduces your other income and the rest becomes a capital loss carryover.
Buying back the same or a substantially identical security within 30 days before or after the sale triggers the wash sale rule, which defers the loss. So most investors switch into something that plays the same role without being the same security. A typical harvest runs like this:
- Find lots trading below their cost basis and note whether each loss is short-term or long-term.
- Check this year’s realized gains and any carryover, so you know what the loss will offset.
- Sell the loss lots, naming them to your broker if you own several, and reinvest in a replacement that is not substantially identical.
- Pause automatic purchases of what you sold; after 31 days, keep the replacement or move back.
Rules and limits for 2026
The capital loss limits are fixed in the tax code and not adjusted for inflation, so 2026 works like recent years. Harvested losses offset any amount of capital gains realized in the same year. Beyond that, the deduction against wages, pensions and other ordinary income is capped at $3,000 a year, or $1,500 for a married person filing separately. Unused losses carry forward with no time limit, but they end with you: a loss still unused at death can be deducted only on the final return.
Two kinds of loss never count. A loss inside a traditional IRA, Roth IRA or 401(k) is not deductible, because gains there are not taxed as capital gains either. Nor is a loss on personal-use property, such as your car or home, even though a gain on it can be taxed.
What a harvested loss is really worth
A harvested loss is worth the tax rate on the income it cancels. Against short-term gains or the $3,000 of ordinary income, it saves your marginal rate, up to 37%. Against long-term gains it saves 15% or 20%, plus the 3.8% net investment income tax for higher earners. Against gains that would have been taxed at 0% it saves nothing, yet the loss is used up all the same, because the netting is automatic.
Most harvesting is also a deferral. The replacement is bought at today’s lower price, so its basis is lower: harvesting a $10,000 loss and reinvesting typically adds roughly $10,000 to a future gain. The lasting value comes from keeping the tax money invested in the meantime, from rate differences such as deducting at 24% now and paying 15% or 0% later, and from never selling. Shares held until death receive a step-up in basis, and shares given to charity avoid the gain, so in those cases the deferred tax is never paid.
Common tax-loss harvesting mistakes
Most harvesting errors come from the wash sale rule or from treating a loss as free money. The rule counts purchases by you and your spouse in every account, including IRAs, while brokers are required to flag only a repurchase of the same security in the same account, so the tracking falls to you. Check these before placing the trade and again before any purchase over the next month, remembering that the window runs straight across year-end.
- Rebuying within 30 days, including through an automatic dividend reinvestment or a scheduled purchase you forgot to switch off.
- Buying the same security in an IRA or Roth IRA: under Rev. Rul. 2008-5 the loss is disallowed and never added to any basis.
- Harvesting in a year when your long-term gains would have been taxed at 0%, spending the loss for no saving.
- Selling the replacement within a year: its holding period starts fresh, so any gain is short-term and taxed at ordinary rates.
- Picking a replacement so different that the portfolio drifts from its target mix, or trading so often that costs outweigh the tax deferred.
How harvesting fits a lifetime plan
Loss harvesting tends to pay most in working years, when your marginal rate is high and gains from rebalancing, fund distributions or selling a concentrated position are taxed at full rates. Market drops are the natural moment, because a broad decline can leave recent purchases below cost even in a portfolio that has risen over time. Harvested losses also make Rebalancing cheaper, since the gains from trimming winners can be offset.
In lower-income years the logic flips. If early retirement or a career break puts your gains in the 0% bracket, tax-gain harvesting is usually the better move, and a large carryover can work against it by absorbing gains that would have been tax-free. Some robo-advisors harvest automatically; the SEC’s investor bulletin on them cautions that the value depends on your tax situation in a given year and that the sales can raise wash sale issues.
Illustrative numbers
Harvesting a loss in 2026: a single filer in the 24% bracket
Short-term gain already realized in 2026$8,000
Loss harvested on a fund held two years$15,000
Net capital loss after netting$7,000
Deducted against ordinary income$3,000
Long-term loss carried to 2027$4,000
Federal income tax saved in 2026$2,640
The loss cancels $8,000 of short-term gain taxed at 24% ($1,920) and $3,000 of ordinary income ($720), saving $2,640 of federal income tax in 2026. The other $4,000 carries into 2027 as a long-term loss. Part of the saving may return later, because the replacement fund was bought at a lower price.
At a glance
Tax-loss harvesting vs. tax-gain harvesting
| Question | Tax-loss harvesting | Tax-gain harvesting |
|---|---|---|
| What you sell | Holdings worth less than their cost basis | Holdings worth more than their cost basis |
| Aim | Realize losses to cut this year’s tax | Realize gains at 0% or a low rate to raise basis |
| Best years | High-income years with taxable gains | Low-income years, such as early retirement |
| Buy back right away? | Not the same or a substantially identical security | Yes; the wash sale rule covers only losses |
| Effect on basis | Replacement starts with a lower basis | Basis rises to the sale price |
| Key 2026 limit | $3,000 a year against ordinary income ($1,500 MFS) | 0% rate up to $49,450 single or $98,900 joint taxable income |
Put it in your plan
Tax-Loss Harvesting in MoneyWhatIf
MoneyWhatIf does not plan tax-loss trades or test them against the wash sale rule. It does follow what realized losses do next: when the plan sells a brokerage holding below its remaining basis, the loss joins a single pool that offsets that year’s capital gains and carries forward against later ones, with no expiry. Losses you have already harvested can be entered under Capital losses in Default settings, and new plans inherit them. The pool is not deducted against ordinary income.
Common questions
Tax-Loss Harvesting FAQs
Can you tax-loss harvest without any capital gains?
Yes. With no gains to offset, a harvested loss reduces wages, pension and other ordinary income by up to $3,000 a year ($1,500 if married filing separately), saving tax at your marginal rate. The rest becomes a carryover that offsets gains in later years, such as when you rebalance or sell a large position. The replacement’s lower basis still means a larger gain whenever you eventually sell it.
Is it better to harvest short-term or long-term losses?
It depends on your gains. Losses first offset gains of their own kind, so when you have both kinds, a short-term loss cancels gains taxed at ordinary rates of up to 37%, while a long-term loss is first absorbed by gains taxed at 15% or 20%. With only one kind of gain, either loss ends up offsetting it. A loss beyond your gains saves your marginal rate on up to $3,000 of ordinary income, whatever its character.
Can I buy the same stock back after tax-loss harvesting?
Yes, once the wash sale window closes. The rule covers purchases in the 30 days before and after the sale, so buying back on the 31st day after the sale keeps the loss. Buying sooner in a taxable account does not destroy the loss: it is added to the new shares’ basis and recognized when you sell them. To stay invested meanwhile, hold something similar that is not substantially identical.
Does tax-loss harvesting work in an IRA or 401(k)?
No. Traditional and Roth IRAs, 401(k)s and similar accounts do not report capital gains or losses, so selling at a loss inside one creates no deduction. They still matter: buying the same security in your IRA within 30 days of selling it at a loss in a taxable account is a wash sale, and under Rev. Rul. 2008-5 that loss is disallowed with no basis increase.
What is the deadline for tax-loss harvesting?
Sell by the last trading day of the year. A loss counts in the tax year of the sale, and for exchange-traded stocks and funds, Publication 550 ends the holding period on the trade date rather than the later settlement date, so a trade placed on December 31 generally counts for that year. Plan the repurchase too: buying the same security in early January can still create a wash sale for a late-December loss.