Tax-Loss Harvesting Guide 2026: Wash Sale Rules, Strategies & Examples

What Is Tax-Loss Harvesting?

Tax-loss harvesting is a strategy where you sell investments at a loss to offset capital gains taxes on your winners. It's essentially turning investment losses into tax savings.

Here's the key insight: the IRS lets you deduct investment losses against your gains. If you sell a stock for a $10,000 gain and another for a $10,000 loss, you owe zero capital gains tax on those transactions. The loss cancels out the gain.

This isn't about trying to lose money. It's about strategically realizing losses that exist on paper to reduce your tax bill while staying invested in the market.

Why It Matters

Consider this scenario:

Investment	Purchase Price	Current Value	Gain/Loss
Apple Stock	$20,000	$35,000	+$15,000
Intel Stock	$15,000	$8,000	-$7,000
Bond Fund	$25,000	$23,000	-$2,000

Without tax-loss harvesting: You sell Apple and owe taxes on $15,000 of gains.

With tax-loss harvesting: You sell Apple, Intel, and the bond fund. Your net gain is only $6,000 ($15,000 - $7,000 - $2,000). You just reduced your taxable gain by 60%.

How Tax-Loss Harvesting Works

The mechanics are straightforward, but the details matter.

Step 1: Identify Losing Positions

Review your taxable brokerage accounts for positions currently trading below your cost basis. These are your harvesting candidates.

Important: Tax-loss harvesting only applies to taxable accounts. It doesn't work in 401(k)s, IRAs, or other tax-advantaged accounts where gains aren't taxed anyway.

Step 2: Sell the Losing Position

Execute the sale to realize the loss. The moment you sell, the loss becomes "realized" and can be used on your tax return.

Step 3: Reinvest Immediately (With a Caveat)

Here's where it gets tricky. You want to stay invested in the market, but you can't buy back the same or "substantially identical" security for 30 days. More on this in the wash sale section.

The Tax Math

Scenario	Capital Gains	Harvested Losses	Taxable Amount	Tax Saved (at 15%)
No harvesting	$50,000	$0	$50,000	$0
Partial harvest	$50,000	$20,000	$30,000	$3,000
Full harvest	$50,000	$50,000	$0	$7,500
Excess losses	$50,000	$60,000	-$10,000*	$7,500+

*Excess losses can offset up to $3,000 of ordinary income per year, with remaining losses carried forward.

The Wash Sale Rule (30-Day Rule)

This is where most people mess up. The IRS created the wash sale rule specifically to prevent abuse of tax-loss harvesting.

What Is a Wash Sale?

A wash sale occurs when you sell a security at a loss and then buy the same or a "substantially identical" security within 30 days before or after the sale.

Read that again: it's a 61-day window. 30 days before the sale, the day of the sale, and 30 days after.

The Consequence

If you trigger a wash sale, your loss is disallowed for tax purposes. You can't use it to offset gains. The disallowed loss gets added to the cost basis of your replacement shares, so it's not lost forever, but it's deferred.

What Counts as "Substantially Identical"

Substantially Identical (Wash Sale)	Not Substantially Identical (OK)
Selling Apple stock, buying Apple stock	Selling Apple stock, buying Microsoft stock
Selling VTI, buying VTSAX (same index)	Selling VTI, buying SCHB (different index)
Selling stock, buying call options on same stock	Selling stock, buying sector ETF containing it
Buying in IRA within 30 days of selling in taxable	Waiting 31 days to repurchase

Common Wash Sale Mistakes

Dividend reinvestment: If you have DRIP enabled, automatic purchases can trigger wash sales
Multiple accounts: Buying in your IRA what you sold in taxable triggers wash sales
Spouse accounts: IRS can attribute spouse purchases to you
Buying before selling: If you bought shares 29 days ago and sell older shares at a loss, it's a wash sale

Wash Sale Safe Harbors

These substitutions are generally considered safe:

Sell S&P 500 fund (SPY), buy total market fund (VTI)
Sell Vanguard S&P 500 (VOO), buy Schwab S&P 500 (SWPPX)
Sell individual stock, buy sector ETF
Sell emerging market ETF from one provider, buy from another

The IRS has never clearly defined "substantially identical" for ETFs tracking similar but not identical indexes. Most tax professionals consider switching between S&P 500 and Total Stock Market safe, but switching between two S&P 500 funds risky.

Offsetting Capital Gains

Understanding the ordering rules is crucial for maximizing your tax benefit.

The Netting Rules

The IRS requires you to net gains and losses in a specific order:

Short-term gains are offset by short-term losses first
Long-term gains are offset by long-term losses first
If you have excess losses in one category, they offset gains in the other
Any remaining net loss offsets up to $3,000 of ordinary income
Unused losses carry forward indefinitely

Why This Matters

Short-term gains are taxed at ordinary income rates (up to 37%). Long-term gains are taxed at preferential rates (0%, 15%, or 20%). If possible, use short-term losses to offset short-term gains first for maximum benefit.

Example: Optimal Netting

Type	Gains	Losses	Net
Short-term	$20,000	$8,000	+$12,000
Long-term	$15,000	$25,000	-$10,000
Combined net	-	-	+$2,000

In this case, the $10,000 net long-term loss offsets the $12,000 net short-term gain, leaving only $2,000 taxable (at short-term rates).

The $3,000 Deduction

If your total losses exceed your total gains, you can deduct up to $3,000 of net capital losses against ordinary income each year. This is valuable because:

Ordinary income tax rates are higher than capital gains rates
Excess losses carry forward forever
You can use $3,000 every year until the losses are exhausted

Carryforward Example

Year	Realized Losses	Realized Gains	Ordinary Income Offset	Carryforward
2026	$50,000	$10,000	$3,000	$37,000
2027	$0	$15,000	$3,000	$19,000
2028	$0	$5,000	$3,000	$11,000
2029	$0	$20,000	-	$0

Practical Harvesting Strategies

Here are the strategies sophisticated investors use.

Strategy 1: Year-End Harvest

The most common approach. In December, review your portfolio for unrealized losses and harvest before year-end. Benefits:

You know your full-year gains to offset
You can calculate exactly how much to harvest
Tax savings are realized on current year return

Strategy 2: Continuous Harvesting

Harvest losses throughout the year whenever they appear. Benefits:

Captures losses that may recover by year-end
Builds up loss carryforwards
Robo-advisors like Betterment and Wealthfront do this automatically

Strategy 3: Volatility Harvesting

Harvest during market downturns when losses are largest. March 2020, for example, created massive harvesting opportunities for investors who acted quickly.

Strategy 4: Tax Lot Selection

Most brokers default to FIFO (first-in, first-out) for selling shares. But you can often select specific tax lots to sell. This lets you:

Sell high-cost lots to maximize losses
Keep low-cost lots for greater tax efficiency later
Choose between short-term and long-term lots strategically

Replacement Security Selection

Sold Position	Replacement Option 1	Replacement Option 2
VOO (Vanguard S&P 500)	IVV (iShares S&P 500)	VTI (Total Market)
VTI (Total Stock Market)	ITOT (iShares Total Market)	SCHB (Schwab Broad Market)
VXUS (International)	IXUS (iShares International)	SPDW (SPDR Developed)
BND (Total Bond)	AGG (iShares Core Bond)	SCHZ (Schwab Aggregate)
VWO (Emerging Markets)	IEMG (iShares EM)	SCHE (Schwab EM)

When to Harvest Losses

Good Times to Harvest

Market corrections: 10-20% drops create harvesting opportunities
Bear markets: Extended downturns maximize available losses
Year-end: When you know your full-year tax picture
High-income years: When you have more gains to offset
Before major life events: Marriage, retirement, job change

Bad Times to Harvest

Immediately before expected recovery: You might miss the rebound
When replacement securities are unavailable: Staying out of market is risky
If losses are tiny: Transaction costs may exceed benefit
When you have no gains to offset: Unless building carryforwards

Harvest Thresholds

Loss Amount	Recommendation	Rationale
Under $100	Skip	Transaction costs likely exceed benefit
$100 - $500	Consider	Worth it if commission-free
$500 - $5,000	Harvest	Material tax savings
Over $5,000	Definitely harvest	Significant tax benefit

Limitations and Considerations

Tax-Loss Harvesting Is a Deferral

This is important to understand. When you harvest a loss and buy a replacement security, your cost basis in the replacement is lower. When you eventually sell the replacement, you'll have a larger gain.

Example:

Scenario	Without Harvesting	With Harvesting
Original purchase	$10,000	$10,000
Value drops to	$7,000	$7,000
Action	Hold	Sell, buy replacement at $7,000
Loss claimed now	$0	$3,000
Value rises to	$15,000	$15,000
Sell	Gain: $5,000	Gain: $8,000

Both scenarios end up with the same total tax, but harvesting lets you use the deduction now. Time value of money makes this worthwhile.

State Tax Considerations

Some states don't follow federal wash sale rules or have different treatment of capital losses. California, for example, follows federal rules, but other states may vary. Check your state's rules.

When Harvesting Hurts

Turning long-term into short-term: If you harvest a stock held 11 months and buy back after 31 days, your holding period restarts
Missing dividends: Some ETF swaps change dividend timing
Tracking error: Replacement securities may perform differently
Complexity: Managing multiple purchases and basis tracking

Documentation Requirements

Keep records of:

All purchase and sale dates
Cost basis for each lot
Wash sale adjustments
Carryforward amounts

Your Tax-Loss Harvesting Action Plan

Getting Started

Review your taxable accounts: Look for positions with unrealized losses
Calculate potential savings: Multiply losses by your marginal rate
Identify replacement securities: Find similar but not identical funds
Disable dividend reinvestment: On positions you might harvest
Set calendar reminders: Check portfolio in December

Annual Checklist

Task	When	Notes
Review unrealized gains/losses	Quarterly	After earnings seasons
Check for large losses to harvest	During corrections	Market drops of 10%+
Full portfolio review	Early December	Before year-end
Execute harvesting trades	Mid-December	Allow time for settlement
Document all transactions	Before year-end	For tax preparation

Tax Savings Potential

Based on a $500,000 portfolio with typical volatility:

Tax Bracket	Annual Harvesting Opportunity	Potential Annual Savings
22% federal	$15,000 - $30,000	$2,250 - $4,500
32% federal	$15,000 - $30,000	$3,300 - $6,600
35% federal	$15,000 - $30,000	$3,750 - $7,500

Over a 30-year investing career, disciplined tax-loss harvesting can add 0.5-1.0% to your annual after-tax returns. That compounds to significant wealth.

Tools That Help

Robo-advisors: Betterment, Wealthfront do automatic harvesting
Brokerage features: Fidelity, Schwab, Vanguard show unrealized gains/losses
Tax software: TurboTax, H&R Block track carryforwards
Spreadsheets: Track your own if you have complex situations

Tax-loss harvesting is one of the few free lunches in investing. It doesn't change your investment returns, but it reduces your tax bill. Over time, that difference compounds into real wealth.

This is educational content, not tax advice. Tax laws are complex and change frequently. Consult a qualified tax professional for advice specific to your situation.