Last updated: October 27, 2026. This article is for general information only and is not personal financial, tax, investment, or legal advice. Tax outcomes depend on your income, filing status, state, and account types, so confirm details with the IRS (IRS.gov) or a qualified tax professional before you sell anything. Examples are hypothetical. This guide is not affiliated with the IRS or any brokerage.
If you sold an investment for less than you paid, the IRS lets that loss work for you. Tax-loss harvesting is the practice of deliberately selling losing investments in a taxable account so the losses cancel out taxable gains, and then reinvesting so your portfolio stays on track. It is a year-end favorite because losses generally have to be realized by December 31 to count on your 2026 return. It also has one trap, the wash sale rule, that can wipe out the benefit if you buy back too soon.
The Short Answer
- What it does: realized capital losses first offset realized capital gains. If losses are larger, up to $3,000 ($1,500 if married filing separately) can reduce other income each year, and the rest carries forward (IRS Tax Topic 409).
- Where it works: only in taxable brokerage accounts. Selling at a loss inside an IRA or 401(k) creates no deductible loss.
- The main trap: if you buy the same or a "substantially identical" security within 30 days before or after the sale, the loss is disallowed for now under the wash sale rule.
- The catch: harvesting usually defers tax rather than erasing it, because your replacement investment starts with a lower cost basis.
- Deadline: the sale generally needs to be completed by the last trading day of 2026. Do not wait for the final hours of December, because you also need to avoid buying back inside the wash sale window.
How Capital Gains and Losses Are Taxed
The IRS treats stocks, bonds, mutual funds, ETFs and most other investments as capital assets. If you held an asset for more than one year, the gain or loss is long-term. If you held it one year or less, it is short-term (IRS Tax Topic 409). The difference matters because long-term gains are taxed at lower rates than short-term gains, which are taxed like ordinary income.
For 2026, one widely published summary of the IRS inflation adjustments lists these long-term capital gains thresholds for taxable income:
| Filing status | 0% rate up to | 15% rate up to | 20% rate above |
|---|---|---|---|
| Single | $49,450 | $545,500 | $545,500 |
| Married filing jointly | $98,900 | $613,700 | $613,700 |
| Head of household | $66,200 | $579,600 | $579,600 |
| Married filing separately | $49,450 | $306,850 | $306,850 |
Higher earners may also owe the 3.8% net investment income tax. The same summary lists the income thresholds as $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married filing separately. These figures come from a secondary source dated December 2025, so check the IRS’s current tables or a tax professional before relying on them.
How Tax-Loss Harvesting Works, Step by Step
- List your realized gains for 2026. Include gains from sold stocks, funds, crypto and any capital gain distributions from mutual funds. Your brokerage’s year-to-date realized gain and loss report is the easiest place to start.
- Find positions trading below what you paid. Look only at taxable accounts. Your cost basis is what you paid, adjusted for reinvested dividends and other changes.
- Sell the losing position before year-end. The loss is realized when the sale happens, not when the price falls.
- Decide how to stay invested. Many investors buy a similar but not substantially identical investment, or wait out the wash sale window before buying back the original (see below).
- Net everything on Schedule D. Losses first offset gains. If net losses remain, you can deduct up to $3,000 against other income and carry the remainder forward (IRS Tax Topic 409). Brokers report sales to you and the IRS on Form 1099-B.
A Worked Example (Hypothetical)
Suppose a single filer in the 22% federal bracket sold some stock earlier this year for a $6,000 long-term gain. Late in the year, they sell a fund that is down $9,000.
- The first $6,000 of the loss cancels the gain. At a 15% long-term rate, that avoids roughly $900 of federal tax.
- The remaining $3,000 is deducted against other income. At a 22% rate, that saves roughly $660.
- No loss is left to carry forward. If the fund had instead been down $12,000, the extra $3,000 would carry into 2027.
These numbers ignore state taxes, the net investment income tax and the interaction of short-term and long-term netting, all of which can change the result. They are illustrations, not predictions for your return.
The Wash Sale Rule: The Part That Trips People Up
According to a summary of IRS Publication 550, a wash sale happens when you sell a security at a loss and buy the same or a "substantially identical" security within 30 days before or after the sale. Counting the sale date, that is a 61-day window. When it applies, the loss is not deductible in that year. Instead, the disallowed loss is generally added to the cost basis of the replacement shares, so the benefit is postponed, not necessarily lost forever.
Points to know:
- The window runs both ways. If you bought more shares of the same stock 20 days before you sold the losing shares, that earlier purchase can trigger the rule.
- It covers more than stocks. Summaries note that stocks, bonds, mutual funds, ETFs and options can be involved.
- Other accounts count. Buying the same security in your IRA, or in an account your spouse controls, can still cause a wash sale. Brokers generally track wash sales only within a single account, so tracking across accounts is your responsibility.
- "Substantially identical" is not fully defined. Shares of two different companies are generally not identical, even in the same industry. For funds, it is less clear. Two ETFs that track the same index may be considered similar, while funds tracking different indexes are usually treated differently. The IRS guidance is not specific, so ask a tax professional if the amount is large.
- Crypto is unsettled. Some summaries say the wash sale rule does not currently apply to cryptocurrency, but the rules are debated and may change, so confirm the current treatment.
A simple date check: if you sell at a loss on December 15, 2026, the window runs from November 15, 2026 through January 14, 2027. Buying back on January 15, 2027 or later would be outside the window. Buying the same stock on December 20 would not.
Common Ways Investors Stay Invested
- Swap for a similar, not identical, investment. For example, sell one company and buy a diversified fund in the same sector, or move between funds that track different indexes. This keeps market exposure while avoiding the same security.
- Wait 31 days. This is the cleanest approach but leaves you out of the market for a month.
- Use new money instead of reinvesting dividends automatically. Automatic dividend reinvestment into the same security can create a surprise wash sale. Consider pausing it near year-end.
When Tax-Loss Harvesting Is Not Worth It
- Your gains are tax-free anyway. If your taxable income falls in the 0% long-term bracket, you may owe nothing on gains, so using losses now may have little value.
- The loss is small. Trading costs, bid-ask spreads and the time cost can outweigh a few hundred dollars of tax savings.
- The account is tax-advantaged. Traditional IRA, Roth IRA, and 401(k) accounts do not produce deductible capital losses.
- You expect much higher tax rates later. Because harvesting lowers your basis, you may pay more tax when you eventually sell the replacement. Deferral helps most when you expect the same or lower rates later, or plan to hold for a long time.
- You would abandon your plan. Do not sell a good long-term investment only for a tax deduction.
Year-End Checklist
- Download your realized gains and losses from every taxable account, including ones at different brokerages.
- Check for purchases of the same securities in the last 30 days, including dividend reinvestments and purchases in an IRA.
- Identify losing lots, and note short-term vs. long-term status.
- Pick a replacement investment, or set a calendar reminder for the day the wash sale window ends.
- Place the sale early enough in December to be completed by the last trading day of the year.
- Keep records of trade confirmations. Save year-end statements and your Form 1099-B for tax time.
- If you owe tax on large gains this year, review your payments. Our guide to the fourth-quarter estimated tax payment explains safe harbor rules.
How This Fits With Other Year-End Moves
Harvesting losses is one lever among several. If you take the standard deduction, our guide to the standard deduction shows how deductions compare. Cash gifts to charity may also help, as covered in our explainer on the 2026 charitable deduction for non-itemizers. If you want to keep adding to retirement accounts, see the 401(k) and IRA contribution limits, and for next year’s rates, read about 2027 tax brackets. If you are retired and taking withdrawals, our guide to required minimum distributions covers the rules that apply to IRAs.
Frequently Asked Questions
How much can I deduct from tax-loss harvesting?
Losses first offset capital gains without limit. If your losses exceed your gains, you can deduct up to $3,000 per year against other income ($1,500 if married filing separately), and carry the rest forward to future years (IRS Tax Topic 409).
What is the wash sale rule in simple terms?
If you sell at a loss and buy the same or a substantially identical security within 30 days before or after, you cannot claim the loss that year. The disallowed loss generally adds to the basis of the replacement shares.
Can I buy back the same stock after 30 days?
Yes. Once the 30-day window after the sale has passed, you can buy it again without triggering a wash sale on that sale, provided you did not also buy within the 30 days before.
Does tax-loss harvesting work in an IRA?
No. Losses inside tax-advantaged retirement accounts are not deductible. Also, buying the same security in an IRA after a taxable-account sale can trigger a wash sale.
Do I have to harvest losses by December 31?
To count on your 2026 tax return, the sale generally needs to be completed in 2026. Losses harvested later apply to 2027.
Is tax-loss harvesting worth it for small portfolios?
It can be, but the savings may be small. A few hundred dollars of tax savings may not be worth the complexity, especially if you are in a low bracket.
Sources: IRS, Tax Topic 409, "Capital gains and losses" (page last reviewed September 24, 2026) for the $3,000 limit, carryover and holding periods; Experian, "Long-Term Capital Gains Rates for 2026" (December 15, 2025), summarizing IRS thresholds and net investment income tax levels; NerdWallet, "Wash-Sale Rule" (updated August 18, 2025), summarizing IRS Publication 550. Rules and thresholds can change, so confirm them with the IRS. Examples are hypothetical and tax savings are rough illustrations.
