Tax-Loss Harvesting: Turn Market Losses into Tax Savings
How to sell losing investments to offset gains, deduct up to $3,000 against ordinary income, and stay clear of the wash sale rule.
Tax-loss harvesting means selling an investment that is down to lock in the loss, using it to cancel out capital gains and up to $3,000 of ordinary income, while staying invested in something similar.
What you'll walk away with
Skim these first — then dig into the details below.
- 1Realized losses offset realized capital gains dollar for dollar.
- 2Excess losses deduct up to $3,000 per year against ordinary income.
- 3Unused losses carry forward indefinitely to future tax years.
- 4Repurchasing a substantially identical security within 30 days triggers the wash sale rule.
Reading helps. Calculating makes it real. Free tools — instant results, no signup.
A market decline is unpleasant, but it creates one genuine opportunity: you can convert a paper loss into a real tax deduction without changing your long-term investment exposure.
The strategy only applies in taxable brokerage accounts. Losses inside a 401(k) or IRA are invisible to the IRS and cannot be harvested.
How the tax benefit stacks
Losses are applied in a specific order, which determines how much value you actually capture in the current year.
- Short-term losses first offset short-term gains, which are taxed at ordinary income rates.
- Long-term losses first offset long-term gains, taxed at 0%, 15%, or 20%.
- Any remaining losses cross over to offset the other category.
- Up to $3,000 of leftover losses deducts against ordinary income each year, or $1,500 if married filing separately.
- Whatever remains carries forward with no expiration date.
How to execute a harvest
The process is mechanical, but the replacement security choice is where mistakes happen. You want similar exposure without triggering the wash sale rule.
- 1
Review your taxable account for positions trading below their cost basis.
- 2
Use specific-lot identification to sell only the shares with losses rather than an average.
- 3
Immediately buy a similar but not substantially identical fund — for example, a different provider’s total market index.
- 4
Do not repurchase the original security for 31 days, including in your IRA or your spouse’s accounts.
- 5
Keep the replacement, or swap back after the window if you have a strong preference.
When harvesting is not worth it
The strategy is often oversold. It defers taxes more than it eliminates them, and in several situations the effort produces nothing.
- You have no taxable brokerage account — nothing to harvest.
- Your taxable income puts you in the 0% long-term capital gains bracket.
- The loss is trivial relative to trading friction and your time.
- You plan to hold the position until death, when heirs receive a stepped-up basis anyway.
- Harvesting lowers your cost basis, so a larger gain is waiting when you eventually sell.
Making it routine
Harvesting works best as an opportunistic habit rather than a year-end scramble, since the best opportunities appear during market drawdowns.
- Check for harvestable losses after any market decline of roughly 10% or more.
- Pre-select replacement funds for each holding so you can act without deliberating.
- Many robo-advisors automate the entire process daily.
- Track your carryforward losses; they are easy to lose sight of when changing tax preparers.
Disclaimer: This page includes AI-assisted educational content reviewed for general accuracy. It is not personalized financial, tax, or legal advice. Verify numbers with a qualified professional and our editorial standards.
Continue reading
Related guides that deepen the same decision.
Wash Sale Rule Explained: Avoid Disallowed Tax Losses
The wash sale rule disallows a tax loss if you buy the same or a substantially identical security within 30 days before or after selling at a loss — the loss is not lost, but it is deferred into the new shares’ cost basis.
ReadTaxesCapital Gains Tax Explained: Short-Term vs Long-Term Rates (2026)
Sell an asset within a year and the gain is taxed as ordinary income; hold at least a year and one day and it qualifies for lower long-term rates of 0%, 15%, or 20%.
ReadInvestingTaxable Brokerage Account: When & How to Use One
A taxable brokerage account is where you invest after maxing out tax-advantaged accounts — it has no contribution limits and no withdrawal restrictions, but you owe tax on dividends each year and on gains when you sell.
ReadReady to plug in your numbers?
Every guide pairs with free calculators — no signup.
Explore all calculators