The Idea in One Paragraph
You bought a stock, it dropped, and you're sitting on a paper loss. Annoying — but it's also a tool. Sell it, and that loss becomes real. A realized loss cancels out a realized gain, dollar for dollar, which means you can use your worst position to erase the tax on your best one. That's tax-loss harvesting. It's one of the few moves in investing where doing something unpleasant — locking in a loss — actually pays you back at tax time.
The whole strategy lives or dies on one rule: the wash sale rule. Break it and the IRS quietly voids your loss. So most of this piece is about doing the harvest cleanly.
§ 01The Math: Why It Works
Capital gains and losses net against each other before you're taxed on anything. Short-term losses hit short-term gains first; long-term losses hit long-term gains first; then any leftovers cross over. The order matters because short-term gains are taxed at your full ordinary rate (up to 37%) while long-term gains top out at 20%.
Here's a clean example. You sold an early winner this year for a $20,000 short-term gain — taxed as ordinary income. Painful. But you're also holding a position that's down $20,000. Sell it. The $20,000 loss wipes out the $20,000 gain. Your taxable gain for the year is now zero. If you're in the 32% bracket, you just saved roughly $6,400 in federal tax on a position you were probably going to trim anyway.
Not sure how a given gain would be taxed in the first place? Run it through the capital gains calculator — seeing the short-term hit at your ordinary rate is usually what makes the case for harvesting obvious.
§ 02The $3,000 Ordinary-Income Bonus
What if your losses are bigger than your gains? Then the strategy gets even better. After your losses soak up every gain you have, you can take up to $3,000 of the leftover loss and deduct it straight against your ordinary income — wages, salary, the high-taxed stuff. ($1,500 if you're married filing separately.)
And whatever's still left after that doesn't vanish. It carries forward to next year, and the year after, with no expiration. People who harvested aggressively during a bad market year can spend the next several years quietly offsetting gains and clipping $3,000 a year off their ordinary income with losses they banked long ago. A carryforward is a tax asset. Track it.
§ 03The Wash Sale Rule, Precisely
Here's the rule that ruins it if you're careless. Under IRC Section 1091, if you sell a security at a loss and buy a substantially identical security within 30 days before or after that sale, the loss is disallowed. That's a 61-day window total — 30 days on each side, plus the day of the sale itself.
People assume it's only 30 days after. It's both directions. If you bought more shares of the same stock three weeks before you sold the original lot at a loss, that purchase can trigger the wash sale just as easily as a repurchase afterward.
And the loss isn't gone forever when this happens — it's deferred. The disallowed loss gets added to the cost basis of the replacement shares. So you'll get the benefit eventually, when you sell those, but you've lost the use of it this year. For a harvest that was meant to offset a gain right now, that's a failed harvest. (Every trigger, the basis-adjustment math, and the IRA trap are laid out in full in the wash sale rule guide.)
§ 04The Traps That Void Your Loss
The wash sale rule is broader than most people think. The ways it catches you:
- Your other accounts count. Sell at a loss in your taxable brokerage, rebuy in another taxable account — still a wash sale. The rule looks across all your accounts.
- Your IRA is the worst version. Sell a stock at a loss in your taxable account, then buy it in your IRA or Roth within 30 days, and the loss is permanently disallowed — it doesn't even get added to basis anywhere. It's gone for good. This is the one trap that actually destroys value rather than just deferring it.
- Your spouse counts. A purchase in your spouse's account inside the window can trigger it too.
- Dividend reinvestment is sneaky. If you have automatic dividend reinvestment turned on, a reinvested dividend that buys a few shares during the window is a purchase — and can wash part of your loss. Turn off DRIP on a position you're about to harvest.
§ 05The Crypto Loophole (Still Open)
Here's the one that surprises people. The wash sale rule applies to "stock or securities." The IRS classifies cryptocurrency as property, not a security. So as of 2026, crypto isn't covered.
That means you can sell Bitcoin at a loss, claim the full loss, and rebuy Bitcoin the same minute — no 30-day wait, no disallowance. You realize the tax loss without ever giving up your position or your upside. For a volatile asset that swings 15% in a week, that's a genuinely powerful, perfectly legal move.
The caveat: Congress has tried to close this gap in multiple budget proposals, and it keeps coming back. It's the kind of loophole that exists until suddenly it doesn't, often with little warning. For now, in 2026, it's open — but don't build a multi-year plan assuming it stays that way. Note too that the new Form 1099-DA means the IRS now sees your crypto sales, so report the harvest cleanly.
§ 06How to Harvest Without Leaving the Market
The obvious objection: "If I sell to grab the loss, I'm out of the position — what if it rebounds during the 30 days?" Fair. The answer is to replace it with something similar but not substantially identical.
Sell one S&P 500 ETF at a loss and buy a different provider's total-market or large-cap ETF that tracks a different index. You stay invested in essentially the same slice of the market, your asset allocation barely moves, and because the two funds aren't "substantially identical," there's no wash sale. After 31 days you can swap back to your original holding if you want — or just keep the replacement.
The IRS has never published a bright-line test for "substantially identical," which makes practitioners cautious: two different funds tracking the same exact index is a gray area best avoided. Different index, different issuer, same broad exposure — that's the clean, well-worn path.
§ 07When It's Worth It — and When It Isn't
Harvesting isn't free money; it's mostly a deferral, and it has costs. Worth knowing where it actually helps:
It shines when you have big short-term gains to offset (you're killing a 37% tax, not a 15% one), when you're in a high bracket, when you have losses that would otherwise expire unused against a gain this year, or when you can harvest crypto with no wash-sale wait.
It's weaker when you're in the 0% long-term bracket anyway (no gain to offset, so you're only getting the $3,000 ordinary deduction), or when harvesting drops your cost basis so low that you're just shoving a bigger gain into the future at a possibly higher rate. Lowering basis today means a larger taxable gain tomorrow — the benefit is the time value of the deferred tax, not a permanent escape.
And one human point: don't let the tax tail wag the investment dog. Harvest losses on positions you were fine trimming anyway. Selling a holding you actually want to own, purely to bank a loss, can cost you more in missed return than you save in tax.
§ 08Key Takeaways
Losses offset gains dollar-for-dollar, no cap, then up to $3,000 against ordinary income, then carry forward forever.
The wash sale rule is a 61-day window — 30 days before and after — and it spans all your accounts, your spouse's, and your IRA. The IRA version permanently destroys the loss.
Stay invested by swapping into a similar-but-not-identical fund during the window.
Crypto is still exempt in 2026 — sell and rebuy at will — but that loophole is on borrowed time.
Once you've harvested, see how the offset changes your bill in the capital gains calculator, and read the full 2026 capital gains guide for the rates underneath it all.
Sources: IRC §1091 (wash sales); IRC §1211 and §1212 (capital loss limitation and carryover); IRS Publication 550 (Investment Income and Expenses); IRS Rev. Proc. 2025-32 (2026 capital gains breakpoints). General information, not tax advice.