By Harry Prabandham · Updated September 27, 2026
Tax Planning
Tax-Loss Harvesting: A Complete Guide
Tax-loss harvesting means selling investments below cost to realize losses that offset gains and up to $3,000 of ordinary income a year.
Tax-Loss Harvesting: A Complete Guide
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The short answer
- Tax-loss harvesting is selling a taxable investment worth less than you paid to realize a capital loss.
- Realized losses offset capital gains, then up to $3,000 of ordinary income a year ($1,500 if married filing separately).
- Unused losses carry forward indefinitely to future years.
- It usually defers tax rather than eliminating it, because the replacement investment has a lower cost basis.
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Full Guide
The short answer
- Tax-loss harvesting is selling a taxable investment worth less than you paid to realize a capital loss.
- Realized losses offset capital gains, then up to $3,000 of ordinary income a year ($1,500 if married filing separately).
- Unused losses carry forward indefinitely to future years.
- It usually defers tax rather than eliminating it, because the replacement investment has a lower cost basis.
How do capital losses offset gains?
- Short-term losses first offset short-term gains, and long-term losses first offset long-term gains.
- Any net loss in one category then offsets net gain in the other.
- Offsetting short-term gains, taxed as ordinary income, generally saves more per dollar than offsetting long-term gains.
- In 2026, long-term gains are taxed at 0% up to $49,450 single or $98,900 joint taxable income, and 15% up to $545,500 or $613,700.
What is the wash sale rule?
- A loss is disallowed if you buy substantially identical securities within 30 days before or after the sale, a 61-day window.
- A disallowed loss is usually added to the basis of the replacement shares, so it is deferred rather than lost.
- Buying the replacement in an IRA or Roth IRA can make the loss permanently unusable.
- IRS guidance treats purchases by your spouse, and by a corporation you control, as your own for wash sale purposes.
What counts as substantially identical?
- Shares of the same company, and options or contracts to buy them, are treated as substantially identical.
- Funds that track the same index from different providers are a gray area that the IRS has not clearly resolved.
- Funds with different indexes, or individual stocks versus a broad fund, are generally treated as not substantially identical.
- Automatic dividend reinvestment and RSU vesting within the window can trigger an accidental wash sale.
When does tax-loss harvesting add less value?
- If you are in the 0% long-term gains bracket, realizing gains may be more useful than realizing losses.
- Harvesting resets basis lower, so a later sale may produce a larger gain, possibly at a higher rate.
- Trading costs, bid-ask spreads, and time out of an identical position can offset part of the benefit.
- California taxes capital gains as ordinary income, so the state value of a loss depends on your state bracket.
Implementation in practice
- Reviewing positions after market declines, not only in December, can catch losses that later recover.
- Replacement holdings are chosen to keep similar market exposure without being substantially identical.
- Specific share identification lets you sell the highest-cost lots first when your custodian supports it.
- Direct indexing can create more harvesting opportunities by holding individual stocks, with added complexity and cost.
Key takeaways
- Harvested losses offset gains and up to $3,000 of ordinary income, with the rest carried forward.
- Watch the 61-day wash sale window across all accounts, including IRAs and a spouse's accounts.
- The benefit is mostly tax deferral, and it depends on current versus future tax rates.
- Rubric Advisors does not prepare tax returns; confirm loss treatment with a CPA before year-end.
Related Topics
Tax Planning
Wash Sale Rule: The 61-Day Window and How It Works
A wash sale occurs when you sell at a loss and buy substantially identical securities within 30 days before or after. The loss is deferred, not deducted.
Tax PlanningCapital Gains Harvesting (0% Rate Strategy)
Gain harvesting realizes long-term gains in low-income years at the 0% federal rate: 2026 taxable income up to $49,450 single or $98,900 joint.
Investing & MarketsDirect Indexing: Owning an Index Stock by Stock
Direct indexing holds an index's stocks individually in your own account, allowing loss harvesting and exclusions a fund cannot offer, at added cost.