Tax-Loss Harvesting

Tax-loss harvesting means selling an investment at a loss in a taxable account so an eligible capital loss can offset capital gains. If losses exceed gains, a limited deduction against other income may be available. The tax result depends on your overall return, including other sales, carryforwards, and wash-sale adjustments.

Owning individual stocks to follow an index or investment strategy can create opportunities to sell selected holdings at a loss even while the portfolio’s overall return is positive. For example, gains in some holdings may outweigh declines in others, allowing you to realize losses on the declining stocks to offset realized capital gains in the account or elsewhere. This approach is often called direct indexing when designed to track an index. A positive portfolio return does not necessarily mean a net taxable capital gain; the tax result depends on which gains and losses you realize.

Generally, a market decline alone does not create a deductible capital loss. You usually must sell or otherwise dispose of the investment and compare the proceeds with its adjusted tax basis. Your brokerage screen’s unrealized loss is therefore different from a realized loss reported for tax purposes. Special rules apply to worthless securities and other unusual situations.

Capital losses first offset capital gains under the netting rules. If you have an overall net capital loss, up to $3,000 can generally reduce other income for the year, or $1,500 if married filing separately. That limit does not cap losses used against capital gains. The deductible amount can be smaller depending on your return.

Illustrative example: A single filer realizes $10,000 in capital gains and $15,000 in deductible capital losses, with no other capital transactions. The losses offset all $10,000 of gains. Assuming sufficient taxable income, another $3,000 reduces other income, and the remaining $2,000 carries forward. The $3,000 limit does not restrict the $10,000 used against gains.

Unused capital losses can generally carry forward to later years. Holdings of one year or less generally produce short-term gains or losses; longer holdings generally produce long-term amounts. Carryovers retain their character when applied in later years. Calculate the carryforward from the return and keep prior Schedule D forms and carryover worksheets.

Illustrative example: You sell stock held for two years at a $12,000 loss and have no other capital transactions. If you are single and have sufficient taxable income, you generally deduct $3,000 against other income and carry $9,000 forward as a long-term capital loss. If you realize $6,000 of long-term gains the following year, that carryover can offset them, leaving $3,000 potentially available against other income, subject to the return’s limits.

A loss on stock or securities is generally disallowed if you acquire substantially identical securities within 30 days before or after the sale. This creates a 61-day review window including the sale date. In a taxable replacement purchase, the disallowed loss generally increases replacement-share basis, postponing the deduction.

Illustrative example: You bought 100 shares for $5,000 and sell them for $4,000. Ten days later, you buy 100 shares of the same stock in a taxable account for $4,200. The $1,000 loss is disallowed for the initial sale and generally added to the replacement shares’ cost, giving them a $5,200 adjusted basis. This generally defers the deduction rather than allowing it immediately.

Yes. A substantially identical purchase in another taxable account can trigger a wash sale. A replacement purchase in your IRA or Roth IRA can also disallow the taxable-account loss, but without adding that loss to your IRA basis. Review transactions across your accounts and institutions before coordinating a sale and replacement purchase.

Yes. Automatic reinvestment can acquire replacement shares, and a spouse’s purchase of substantially identical stock can also create a wash sale. Even a smaller purchase may disallow part of the loss. Check scheduled transactions and household holdings across institutions before selling.

A replacement investment must be evaluated for whether it is substantially identical. A different ticker or fund provider does not by itself establish that the purchase avoids a wash sale. Review the investments’ characteristics and the overall facts, including how the replacement fits your portfolio.

IRS examples: Publication 550 describes repurchasing the same company’s stock as substantially identical. Stock in a predecessor company and its successor after a reorganization may also qualify. Convertible preferred stock can be substantially identical to common stock when it is freely convertible, has the same voting rights and dividend restrictions, and trades close to its conversion value. Convertible bonds may also qualify depending on their values, price movements, and other circumstances.

The IRS generally distinguishes stocks of unrelated corporations, but requires a facts-and-circumstances review. These examples do not establish that any particular pair of ETFs or mutual funds avoids a wash sale. Review the specific replacement with your tax preparer or financial advisor.

Shares bought at different times can have different cost bases and holding periods. Selecting which shares to sell affects the realized gain or loss. When using specific identification, follow the broker’s identification process and retain confirmation; otherwise, default basis rules may apply. Review the selected lot and basis method before the sale is completed.

You can review losses throughout the year. For ordinary market-traded stock sales, the trade date generally determines the tax year, rather than settlement. Leave time to coordinate trades and review January purchases, which can still affect a December loss under wash-sale rules.

Illustrative example: An ordinary stock sale executed December 31, 2026, generally belongs on your 2026 return even if it settles in January 2027. But if you sell 100 shares at a loss December 31 and repurchase 100 shares of the same stock January 15, the purchase is within 30 days and generally disallows that December loss under the wash-sale rule.

No. A replacement investment’s new purchase price generally becomes its cost basis. Buying at a lower price can therefore create a larger taxable gain if it later rises and is sold. Any current benefit should be weighed against future taxes, trading costs, and the investment change. The outcome depends on your tax situation and subsequent transactions.

Keep Forms 1099-B, trade confirmations, adjusted basis records, prior loss carryovers, and transaction histories from other relevant accounts. Investment sales and adjustments are generally reported using Form 8949 and Schedule D, subject to reporting exceptions. A broker’s wash-sale reporting may not capture every cross-account transaction, so review the full history before filing.