Tax-Loss Harvesting Guide — Offset Capital Gains and Cut Your Tax Bill
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Key Takeaways
Capital losses can offset unlimited capital gains plus up to $3,000 in ordinary income annually, with unused losses carrying forward indefinitely.
The wash-sale rule prevents repurchasing a substantially identical security within 30 days, but buying a similar (not identical) replacement maintains market exposure.
Short-term losses offsetting short-term gains provide the highest tax savings — up to 37 cents per dollar of loss at the top federal rate.
Investors in the 0% long-term capital gains bracket should generally avoid harvesting long-term losses since those gains are already tax-free.
Year-round harvesting captures more opportunities than a single December review, since average intra-year market drawdowns create losses even in positive years.
Tax-loss harvesting is one of the most effective legal strategies available to investors for reducing their tax liability. The concept is simple: sell investments that have declined in value to realize losses, then use those losses to offset capital gains and up to $3,000 of ordinary income per year. Any unused losses carry forward indefinitely until fully utilized.
The strategy has become increasingly accessible as major brokerages — including Schwab, Fidelity, and Vanguard — have automated harvesting features in their platforms, and commission-free trading has eliminated the transaction cost barrier. With the 10-year Treasury yield hovering around 4.02% and the Federal Reserve's rate cuts reshaping fixed-income returns, many investors are sitting on a mix of gains and losses across their portfolios that creates prime harvesting opportunities.
But tax-loss harvesting is not as simple as selling losers and calling it a day. The IRS wash-sale rule, the distinction between short-term and long-term losses, and the interaction with your overall [capital gains tax](/article/capital-gains-tax-explained-short-term-vs-long-term-rates-and-how-to-minimize-your-tax-bill) bracket all determine whether harvesting actually saves you money. This guide covers the mechanics, the rules, and the practical strategies that make harvesting worthwhile.
How Tax-Loss Harvesting Works — The Core Mechanics
The Wash-Sale Rule — What You Cannot Do
Short-Term vs. Long-Term Losses — Maximizing Tax Savings
Tax Savings per $1,000 of Harvested Loss by Scenario
Investors in the 0% long-term capital gains bracket should be cautious about harvesting. If your taxable income is below $49,450 (single) or $98,900 (married), your long-term gains are already tax-free — harvesting losses to offset them generates no tax benefit while potentially resetting your cost basis to a lower level.
Practical Strategies and Year-End Planning
Common Mistakes and When Harvesting Hurts
Conclusion
Tax-loss harvesting is a genuine wealth-building strategy, not a gimmick. By systematically realizing losses to offset gains and reduce ordinary income, investors can redirect thousands of dollars per year from tax payments into continued portfolio growth. The wash-sale rule demands attention but is straightforward to navigate once understood — the key is buying a similar but not identical replacement and waiting 31 days before repurchasing the original.
The strategy works best for investors with taxable brokerage accounts, diversified holdings across multiple funds, and marginal tax rates high enough to make the offset meaningful. For taxpayers in the 24% federal bracket or above — or those in high-tax states — the combined federal and state savings from disciplined harvesting compound significantly over a multi-decade investing horizon.
To understand how harvested losses interact with your overall tax picture, see our guide to [Capital Gains Tax](/article/capital-gains-tax-explained-short-term-vs-long-term-rates-and-how-to-minimize-your-tax-bill) rates and our overview of [Federal Tax Brackets for 2026](/article/federal-tax-brackets-for-2026-rates-income-thresholds-and-filing-strategies). For specific stock analysis that might inform your harvesting decisions, explore our [stock analysis](/stocks) pages.
Disclaimer: This content is AI-generated for informational purposes only and does not constitute financial advice. Consult qualified professionals before making investment decisions.
Step 1: Identify losing positions. Review your taxable brokerage accounts for investments trading below your cost basis (what you originally paid). Only unrealized losses in taxable accounts count — losses in IRAs, 401(k)s, and other tax-advantaged accounts cannot be harvested because those gains are not taxed annually.
Step 2: Sell to realize the loss. When you sell an investment for less than your cost basis, the loss becomes realized and can be reported on your tax return. A stock purchased at $50 and sold at $35 generates a $15 per-share capital loss.
Step 3: Use losses to offset gains. Capital losses first offset capital gains of the same type (short-term losses offset short-term gains, long-term losses offset long-term gains). If you have excess losses after netting, short-term losses can offset long-term gains and vice versa. After offsetting all gains, up to $3,000 in net capital losses can be deducted against ordinary income ($1,500 if married filing separately). Any remaining losses carry forward to the next tax year.
The ordering matters because short-term capital gains are taxed at your ordinary income rate (up to 37% for the 2026 tax year), while long-term gains face lower rates of 0%, 15%, or 20%. Offsetting a short-term gain with a loss saves more tax dollars than offsetting a long-term gain at the same dollar amount.
The IRS wash-sale rule is the most important constraint on tax-loss harvesting. Under IRS Section 1091, if you sell a security at a loss and purchase a "substantially identical" security within 30 days before or after the sale, the loss is disallowed for tax purposes. The 30-day window runs in both directions, creating a 61-day window of restriction.
What triggers a wash sale:
Buying the same stock or fund within the 61-day window
Buying a substantially identical mutual fund or ETF (e.g., selling Vanguard S&P 500 ETF and buying Vanguard S&P 500 Index Fund)
Buying the same security in a different account, including an IRA or spouse's account
Acquiring the same security through dividend reinvestment within the window
What does NOT trigger a wash sale:
Selling an S&P 500 index fund and buying a total stock market index fund (these track different indices)
Selling one company's stock and buying a competitor in the same sector
Selling a bond fund and buying a different bond fund with a different duration or credit profile
Waiting the full 31 days before repurchasing the same security
When a wash sale occurs, the disallowed loss is added to the cost basis of the replacement security. This means the loss is not permanently lost — it is deferred until you eventually sell the replacement without triggering another wash sale. However, the immediate tax benefit is eliminated, which defeats the purpose of harvesting.
One important nuance: the wash-sale rule applies across all accounts you own, including IRAs. If you sell a stock at a loss in your taxable account and buy it within 30 days in your IRA, the loss is permanently disallowed because IRA transactions do not generate deductible losses.
Not all harvested losses are equally valuable. The tax savings depend on what type of gain the loss offsets.
For the 2026 tax year, long-term capital gains rates are 0% for single filers with taxable income up to $49,450 (up to $98,900 for married filing jointly), 15% up to $545,500 (up to $613,700 married), and 20% above those thresholds. Short-term capital gains, however, are taxed at your ordinary income tax rate — which ranges from 10% to 37% based on your federal tax bracket.
This creates a clear hierarchy of harvesting value:
Most valuable: Short-term loss offsetting a short-term gain (saves up to 37 cents per dollar of loss)
Second: Any loss offsetting ordinary income via the $3,000 deduction (saves at your marginal rate)
Third: Short-term loss offsetting a long-term gain (saves 15-20 cents per dollar)
Fourth: Long-term loss offsetting a long-term gain (saves 15-20 cents per dollar)
Harvest throughout the year, not just in December. Market volatility creates harvesting opportunities in every season. The S&P 500's average intra-year drawdown is roughly 14%, meaning temporary losses appear regularly even in positive years. Setting up a quarterly review of your portfolio for harvesting candidates captures more opportunities than a single year-end check.
Pair harvesting with portfolio rebalancing. Tax-loss harvesting creates a natural opportunity to rebalance. When you sell a declining position and buy a non-identical replacement, you can shift toward your target allocation. For example, selling a losing large-cap growth fund and replacing it with a total market fund maintains equity exposure while improving diversification.
The $3,000 ordinary income deduction compounds over time. Even in years when you have no capital gains, harvesting losses to bank the $3,000 ordinary income deduction is valuable. For a taxpayer in the 24% bracket, that saves $720 per year. Carried over a decade, this adds up to $7,200 in tax savings — meaningful on its own and essentially free if you maintain equivalent market exposure through a replacement investment.
Track your cost basis carefully. Brokerage statements show your cost basis, but lot-level detail matters. Using specific identification (selecting which shares to sell) rather than average cost allows you to harvest the highest-cost lots while keeping the lower-cost lots for future long-term gains treatment. Most brokerages offer lot selection tools in their trade interfaces.
Consider state taxes. If you live in a state with capital gains taxes (most do, with notable exceptions like Florida, Texas, and Nevada), tax-loss harvesting provides an additional layer of savings at the state level. In California, where the top rate is 13.3%, harvesting a $10,000 short-term loss could save over $5,000 in combined federal and state taxes.
Mistake 1: Selling and not reinvesting. Harvesting is a tax strategy, not an investment strategy. If you sell a losing S&P 500 fund and park the proceeds in cash, you miss any subsequent recovery. The goal is to stay invested in a similar (but not substantially identical) asset to maintain your market exposure.
Mistake 2: Triggering wash sales through automatic reinvestment. Dividend reinvestment programs (DRIPs) can inadvertently trigger wash sales if they purchase shares of a security you recently sold at a loss. Pause DRIPs on any security you plan to harvest before executing the sale.
Mistake 3: Harvesting in tax-advantaged accounts. Losses realized inside an IRA or 401(k) have no tax benefit and cannot be used to offset gains or income in taxable accounts. Only harvest in taxable brokerage accounts.
Mistake 4: Ignoring the long-term cost basis impact. When you harvest a loss and buy a replacement at a lower price, your new cost basis is lower. This means future gains on the replacement will be larger, creating a deferred tax liability. Tax-loss harvesting does not eliminate taxes — it defers them. The strategy works because a dollar of tax savings today is worth more than a dollar of tax paid years from now, especially if your future tax rate is the same or lower.
When harvesting does not make sense:
You are in the 0% long-term capital gains bracket and have only long-term gains
Transaction costs (if any) exceed the tax benefit of small losses
You plan to donate the asset to charity (donated appreciated assets avoid capital gains entirely)
The loss is so small that the administrative effort outweighs the savings