How Tax Loss Harvesting Works

What Tax Loss Harvesting Can Deduct Each Year

Tax loss harvesting works by selling an asset for less than its adjusted basis and claiming the difference as a capital loss. IRS Topic 409 says an asset's basis is generally its cost, and a sale for more than that basis is a capital gain. Losses from selling personal-use property, such as a home or car, are not tax deductible.

A capital loss on an investment cancels capital gains. If losses are still left over, you can claim the lesser of $3,000 ($1,500 if married filing separately) or your total net loss from line 16 of Schedule D against your other income. Any net loss above that limit carries forward to later years.

The holding period sets the type of loss. IRS Topic 409 treats an asset held more than one year as long-term and one held one year or less as short-term.

The type matters because the two are taxed differently. Net short-term capital gains are taxed as ordinary income at graduated rates. Most net capital gain is taxed at 0%, 15% or 20%. IRS Topic 409 names higher maximum rates for a few gains: 28% for collectibles and section 1202 stock, and 25% for unrecaptured section 1250 gain.

What a Harvested Loss Is Worth at 0%, 15% and 20%

A harvested loss is worth the tax rate on the gain it cancels, multiplied by the size of the loss. In our internal modeling, we ran a $10,000 harvested loss against $10,000 of long-term gains taxed at 0%, 15% and 20%. The saving came out to the rate times the loss, which is nothing at 0%.

The inputs are a $10,000 loss, $10,000 of long-term gain and one federal rate per row. The model leaves out ordinary-income rates, state tax, the net investment income tax and transaction costs, so every figure is illustrative.

Your rate depends on your 2026 taxable income, and that test includes the gain itself. IRS Revenue Procedure 2025-32 sets these 2026 ceilings for the 0% and 15% rates:

• Married filing jointly: 0% up to $98,900, 15% up to $613,700
• Head of household: 0% up to $66,200, 15% up to $579,600
• Married filing separately: 0% up to $49,450, 15% up to $306,850
• All other individuals: 0% up to $49,450, 15% up to $545,500

Above the 15% ceiling for your filing status, the 20% rate applies.

A year with losses and no gains works differently. With a $10,000 net capital loss and no gains, our model deducts $3,000 against other income and carries $7,000 forward. A married person filing separately deducts $1,500. The cash value of that deduction depends on the rate on your other income, which we did not model. A tax professional can apply your rate.

Tax Loss Harvesting Usually Defers Tax to a Later Year

Tax loss harvesting usually moves tax to a later year, because the replacement you buy has a lower basis than the investment you sold. In our internal modeling, a share bought for $10,000 and sold at $7,000 produces a $3,000 loss. A replacement bought for $7,000 has a $7,000 basis.

Sell that replacement later for $10,000 and you realize a $3,000 gain. The gain equals the loss you harvested.

The tax comes back unless the rates differ between the two years or the gain is never realized. A later rate above today's rate makes the deferral cost more than it saved. Some cases, such as a 0% year, a basis step-up at death or a gift to charity, can change the result. A tax professional can explain how they apply to your return.

The Wash Sale Rule and Tax Loss Harvesting in an IRA

The wash sale rule blocks a harvested loss when, within 30 days before or after the sale, you acquire substantially identical stock or securities. IRS Publication 550 lists four ways to trigger it:

• Buy substantially identical stock or securities
• Acquire substantially identical stock or securities in a fully taxable trade
• Acquire a contract or option to buy substantially identical stock or securities
• Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA

A purchase of substantially identical stock by your spouse or by a corporation you control also creates a wash sale.

In a taxable account, the disallowed loss is added to the cost of the new shares, which becomes their basis. The added cost postpones the deduction until you sell the new shares, and the holding period of the shares you sold carries over to them. Publication 550 gives this example. You buy 100 shares of X stock for $1,000 and sell them for $750. Within 30 days you buy 100 shares for $800. You cannot deduct the $250 loss, and your new basis is $1,050.

When the repurchase is for an IRA or Roth IRA, Publication 550 does not add the disallowed loss to the cost of the new stock. A tax professional can explain what that means for your loss.

No mechanical formula defines substantially identical, as our wash sale rule guide explains. You weigh all the facts and circumstances, and stock of two different corporations is ordinarily not substantially identical.

When Tax Loss Harvesting Does Not Pay

Tax loss harvesting saves nothing now when the gains it cancels would have been taxed at 0%. Four cases reduce or remove the benefit:

• Your 2026 taxable income, including the gain, is at or below the 0% ceiling for your filing status, so the loss cancels gain that carried no federal tax.
• You have no gains, so the loss lowers other income by at most $3,000 a year ($1,500 if married filing separately) and the rest waits in carryover.
• You buy back the same or a substantially identical security inside the 30-day windows, including in an IRA.
• Your tax rate when you sell the replacement is higher than the rate on the gains you cancelled.

The rules above describe sales in taxable accounts that you report on Form 8949. Losses inside an IRA or another tax-deferred account are a question for a tax professional. If you need a decision on your own holdings, a tax professional can apply these rules to your return.

Our answer would change if your bracket differs from the ones modeled, or if the $3,000 limit or the wash sale rule changes. The IRS pages cited above do not cover state tax treatment, the net investment income tax or cryptocurrency, so a tax professional can add those to your figures. Our wash sale rule guide covers how brokers report wash sales across accounts. Our tax tips guide covers other year-end moves.

How to Report a Harvested Loss

You report a harvested loss on Form 8949, Sales and Other Dispositions of Capital Assets, which IRS Topic 409 names as the form for most sales of capital assets. Each sale's gain or loss is figured there and then totalled on Schedule D.

IRS Publication 550 has you combine your net short-term gain or loss from Schedule D line 7 with your net long-term gain or loss from line 15. The total goes on Part III, line 16. A net loss allowed against other income goes on line 7a of Form 1040, Form 1040-SR or Form 1040-NR.

Any loss above the yearly limit is tracked with the Capital Loss Carryover Worksheet. That worksheet appears in Publication 550 and in the IRS Instructions for Schedule D, with separate lines for short-term and long-term carryovers. To figure the tax on one specific sale before you report it, use our Stock Capital Gains Tax Calculator.

Our Takeaway

For a US taxpayer with realized capital gains taxed at 15% or 20%, harvesting a loss saves 15 or 20 cents of federal tax per dollar of loss now. With gains taxed at 0% it saves nothing, and with no gains it saves tax only on the first $3,000 of loss a year. That conclusion applies to taxable accounts and rests on IRS rules plus our worked arithmetic.

The answer changes if you buy the same or a substantially identical security within the 30-day windows, including in an IRA. It also changes if a higher future rate makes the deferral cost more than it saved.

List your 2026 realized gains and losses, and check your trade history for any repurchase inside the 30-day windows before you harvest a loss. If your case is not simple, take that list to a tax professional before any tax loss harvesting sale.

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