Tax-Loss Harvesting: How to Cut Your Tax Bill With Losing Trades

Quick Answer

Tax-loss harvesting means selling a losing investment to realize the loss, then using that loss to offset capital gains. Long-term capital losses offset long-term gains (taxed at 0%, 15%, or 20%); short-term losses offset short-term gains (taxed at ordinary income rates). You can deduct up to $3,000 in excess losses annually; remaining losses carry forward indefinitely. Reinvest immediately in a similar-but-different security to avoid wash-sale violations.

Why Tax-Loss Harvesting Works

Capital gains taxes can consume 15–20% of investment profits (plus 3.8% net investment income tax for high earners). If you realize $100,000 in capital gains at the 20% long-term rate plus 3.8% NIIT, you owe $23,800—23.8% of your gains.

Tax-loss harvesting lets you "buy back" that tax burden. By realizing losses on underperforming positions, you offset gains and reduce taxable capital gains. The offset reduces your income tax without affecting your long-term investment strategy.

Example: You have $50,000 in stock gains and $30,000 in stock losses. Without harvesting, you owe tax on $50,000 gain. By harvesting the losses, your net gain is $20,000, and you owe tax on only $20,000. At 20% plus 3.8% NIIT, you save $4,760 in taxes ($50k – $20k = $30k offset × 23.8%).

Capital Gains Tax Rates in 2026

Long-term capital gains (assets held 1+ years) are taxed at preferential rates:

Short-term gains (assets held < 1 year) are taxed as ordinary income at your marginal rate (10–37%).

High earners pay an additional 3.8% Net Investment Income Tax (NIIT) on net capital gains if MAGI exceeds $200,000 (single) or $250,000 (joint).

Mechanics: The Wash-Sale Rule

After harvesting a loss, you must avoid buying the same security within 30 days before or 30 days after the sale (61-day window). The IRS calls this the "wash-sale rule." Violating it disallows the loss.

Example: You sell XYZ stock on June 15 at a $10,000 loss. You cannot repurchase XYZ stock before July 15 (30 days after). If you buy XYZ stock on June 20, the loss is disallowed, and the loss is instead added to the cost basis of the new shares.

The solution: Reinvest in a similar but different security. If you sell a large-cap U.S. stock index fund, repurchase a different large-cap index fund. If you sell a specific company stock, repurchase a sector ETF or competitor stock. The wash-sale rule applies to the specific security, not the sector or asset class.

After the 30-day window, you can buy back the original security without restriction.

Harvesting Short-Term vs. Long-Term Losses

The type of loss (short or long-term) depends on how long you held the asset.

• Long-term loss (asset held 1+ years): Offsets long-term gains, then short-term gains.
• Short-term loss (asset held < 1 year): Offsets short-term gains, then long-term gains.

You want long-term losses because they offset long-term gains (taxed at favorable 15–20% rates). But if you have short-term gains (say, trading profits taxed at 37%), short-term losses are equally valuable.

Example: You have $50,000 long-term gain (15% tax = $7,500 owed) and $10,000 short-term loss. The loss offsets the gain to $40,000 long-term gain, saving $1,500 in taxes.

Harvesting Strategy: Layering Positions

To maximize harvesting opportunities, build diversified portfolios with individual stocks, funds, and ETFs. When you want to harvest, you can:

1. Sell the specific security at a loss.
2. Immediately repurchase a similar (but not identical) security to maintain exposure.
3. After 31 days, if you prefer, swap back to the original security.

Example positions:

• Sell Apple stock (down 15%) → Repurchase Magnificent 7 Tech ETF (similar exposure, different security)
• Sell Vanguard S&P 500 Index → Repurchase Fidelity S&P 500 Index (similar exposure, different fund)
• Sell XYZ small-cap growth fund → Repurchase a different small-cap growth manager

You maintain your strategic exposure without triggering wash sales.

Carrying Forward Excess Losses

In 2026, you can deduct up to $3,000 in net capital losses against ordinary income. If your losses exceed $3,000, the excess carries forward indefinitely.

Example: You harvest $50,000 in losses and have $20,000 in gains.

• Net loss: $30,000
• Deduction (capped): $3,000
• Carryforward loss: $27,000

You can deduct $3,000 against your ordinary income in 2026 (salary, interest, dividends, etc.), reducing your taxable income by $3,000. In 2027, you can deduct another $3,000, and the remaining $24,000 carries forward to 2028, and so on.

Losses never expire—you'll eventually use them all, even if it takes decades.

Advanced Strategy: "Doubling Down" With Dividends

If a security pays dividends, you can harvest a loss, then reinvest in a similar security paying a higher dividend. Over time, the higher dividend income compensates for the interim loss, and you've reduced your tax on the original gain.

Example:

• Sell XYZ stock (2% dividend yield) at a $5,000 loss.
• Repurchase ABC stock (4% dividend yield, similar exposure).
• The higher dividend income adds $1,000/year on a $50,000 position, compensating for the loss over 5 years.
• Net effect: You harvested a $5,000 loss AND improved dividend income.

Harvesting in Taxable vs. Retirement Accounts

Tax-loss harvesting only works in taxable brokerage accounts. Losses in retirement accounts (401(k), IRA, Roth IRA) cannot be harvested—they're tax-deferred/tax-free anyway.

If you hold the same security in both taxable and retirement accounts, selling the taxable position and rebuying in the retirement account avoids wash-sale issues entirely (they're separate "accounts" for tax purposes). However, many investors don't have retirement assets large enough to make this worthwhile.

Year-End Harvesting Blitz

Many investors harvest losses in November–December before year-end. You must complete the sale (settlement) by December 31 to claim the loss on that tax year's return. Selling on December 31 is fine; buying back on January 30 is fine (outside the wash-sale window). Plan ahead—don't rush last-minute tax harvesting and make poor reinvestment decisions.

Automated Tools and Services

Robo-advisors and tax-loss harvesting services (like Betterment, Wealthfront, Schwab) automate this for you. They continuously monitor portfolios and harvest losses opportunistically—the cost is a small fee (0.25–0.50% annually) but can save thousands in taxes.

Use the /products/tax-loss-harvesting tool to estimate annual tax savings from your portfolio.

Pitfall: Turning Winners Into Losers

Don't harvest losses from your best investments just to offset gains from worse performers. If XYZ stock fell 10% but you believe it will recover, you might harvest the loss and reinvest in a similar (but not identical) security, keeping your exposure. But don't abandon a position you're confident in just for a tax deduction.

Sources

• Internal Revenue Service. "Wash Sales." IRS.gov.
• Internal Revenue Service. "Capital Gains and Losses." IRS.gov.
• Internal Revenue Service. Publication 550: Investment Income and Expenses.
• SEC. "Investor Bulletin: Tax-Loss Harvesting." SEC.gov.
• CFA Institute. "Tax-Loss Harvesting in Modern Portfolio Management."