In 60 seconds: Tax-loss harvesting lets you sell losing investments in a taxable account to wipe out capital gains — and up to $3,000 of ordinary income — but only if you sell by December 31 and stay clear of the 61-day wash-sale window.
- Losses in a taxable brokerage account offset capital gains dollar for dollar, with no cap on that offset.
- Up to $3,000 of leftover net losses ($1,500 if married filing separately) can reduce ordinary income each year; the rest carries forward indefinitely.
- The wash-sale rule disallows a loss if you buy the same or a substantially identical security within 30 days before or after the sale.
- The tax year is set by the trade date, not the settlement date — trades must be placed by December 31, 2026.
- Buying the same stock back inside an IRA within the window can destroy the tax benefit permanently.
If this year's market swings left you holding some losers, those red positions might be worth something after all. Not as investments — as tax savings. The trick is knowing the rules before you sell, because one wrong repurchase can erase the whole benefit.
The New York Stock Exchange. Photo: Kimon Berlin via Wikimedia Commons
What tax-loss harvesting actually is
At its core, it's simple: you sell an investment that has dropped in value to "realize" the loss, then use that loss to cancel out taxes on gains you made elsewhere. Sold one stock for a nice profit and another at a loss? The loss offsets the gain, dollar for dollar, with no ceiling on how much gain you can offset.
Two catches matter right away. This only works in a taxable brokerage account — losses inside an IRA or a 401(k) produce no deduction, because those accounts don't tax you on gains in the first place. And an unrealized loss counts for nothing: a stock that's down but unsold gives you no deduction until you actually sell.
The rules that decide whether it works
The IRS applies losses in a strict order. Short-term losses offset short-term gains first, and long-term losses offset long-term gains first; then the totals are netted on Schedule D, with individual sales reported on Form 8949. If your losses are bigger than your gains, up to $3,000 of the remainder ($1,500 if married filing separately) can reduce ordinary income like salary or interest — and anything beyond that carries forward to future years indefinitely. It never expires.
Timing is the rule people get wrong most often. Per IRS Publication 550, the tax year is determined by the trade date, not the settlement date. December 31, 2026 falls on a Thursday, so trades need to be placed by the market close that day to count for 2026.
Then there's the wash-sale rule, the one that trips up even careful investors. Under IRC §1091, your loss is disallowed if you buy the same or a "substantially identical" security within 30 days before or after the sale — a 61-day window including the trade day. And the rule follows you across every account you control, including your spouse's accounts and your retirement accounts.
A simple worked example
Here's the math on round numbers:
| Item | Amount |
|---|---|
| Realized capital gains this year | $50,000 |
| Realized capital losses harvested | $53,000 |
| Gains wiped out by losses | $50,000 |
| Applied against salary (ordinary income) | $3,000 |
| Carried forward to future years | $0 |
Simplified illustration for education, not a tax return.
The mistakes that wipe out the benefit
The most common mistake is rebuying too soon. Sell at a loss on Monday and buy back the next week, and the wash-sale rule disallows the loss. In a taxable account the loss isn't gone forever — it's added to the replacement shares' cost basis and deferred until you sell those. Annoying, but recoverable.
The expensive version involves retirement accounts. Sell at a loss in your taxable account and rebuy the same stock inside your IRA within the window, and under IRS Revenue Ruling 2008-5 the disallowed loss is not added to basis inside the IRA — the benefit is permanently lost. The same trap applies if your spouse buys the same security within the window. If you want to stay invested, buy something similar but not substantially identical, or wait out the full 30 days.
One more wrinkle: cryptocurrency is currently treated as property, not a security, so the wash-sale rule technically does not apply to crypto under current IRS guidance — though Congress has proposed extending it. Don't assume that gap stays open forever.
What to do before December 31
Start by reviewing your taxable accounts, not your retirement ones. List the positions sitting at a loss and the gains you've already realized this year — that's the gap your harvested losses need to fill. If you harvest, mark the calendar: no repurchase of the same security for at least 30 days after the sale, and check that nobody in your household (or your IRA) bought it in the 30 days before.
Keep clean records for Form 8949, and place your final trades by the closing bell on December 31 so they count for 2026. Done right, a bad year in the market still hands you something back at tax time.
This article is general information, not tax advice. Check with a tax professional about your own situation.
Frequently asked questions
What is tax-loss harvesting?
It is the practice of selling investments at a loss in a taxable account to offset realized capital gains, reducing your overall tax bill.
How much can I deduct?
You can offset capital gains dollar for dollar with no limit. If losses exceed gains, up to $3,000 ($1,500 if married filing separately) can reduce ordinary income per year, with the rest carrying forward indefinitely.
What is the wash-sale rule?
Under IRC §1091, a loss is disallowed if you buy the same or a substantially identical security within 30 days before or after the sale — a 61-day window including the trade day.
Does tax-loss harvesting work for crypto?
Under current IRS guidance, cryptocurrency is treated as property, not a security, so the wash-sale rule technically does not apply — though Congress has proposed extending it.
Sources: IRS Publication 550 (Investment Income and Expenses); IRS Topic No. 409 (Capital Gains and Losses); 26 USC §1091 and §1211; IRS Revenue Ruling 2008-5.
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