Tax-loss harvesting is the practice of selling an investment that has fallen in value to realize a capital loss, then using that loss to offset capital gains elsewhere in the portfolio or, within a strict annual limit, ordinary income, while reinvesting the proceeds to keep the portfolio’s market exposure intact.
In plain terms
Nobody enjoys owning a position that’s down, but a loss that’s never sold does nothing for a tax bill. Selling it converts a paper loss into a realized one that can be used right away against gains realized elsewhere — on the same day, in the same account, even in a completely different asset class — and the investor can then buy a similar, though not identical, replacement so the money stays invested.
How it works
The loss first offsets capital gains dollar for dollar, with no cap: $50,000 of harvested losses can fully offset $50,000 of gains from, say, selling a concentrated stock position or a business. Only once gains are used up does any further loss apply against ordinary income, and there it’s capped — the lesser of $3,000 ($1,500 if married filing separately) or the net loss for the year, under IRC Section 1211. Anything beyond that carries forward to future tax years indefinitely.
The constraint on the replacement trade is the wash sale rule under IRC Section 1091: buying a “substantially identical” security within 30 days before or after the sale disallows the loss and adds it to the replacement security’s cost basis instead of eliminating it. This is why a harvested position is typically replaced with a similar but not identical holding — a different fund tracking the same sector, for instance — rather than bought straight back.
The numbers
- Unlimited offset against realized capital gains.
- $3,000 ($1,500 married filing separately) annual limit against ordinary income once gains are exhausted, in tax year 2026.
- Unlimited carryforward of any loss beyond that limit, per IRS Publication 550.
- 30 days before and after a sale — the wash sale window for “substantially identical” securities.
- Not covered by the wash sale rule as of 2026: cryptocurrency and other digital assets, which the IRS still treats as property rather than securities — a gap Congress has proposed closing but has not yet enacted.
What people get wrong
That a harvested loss is free money. It’s a deferral, not an elimination: buying the replacement security at a lower cost basis means a larger taxable gain whenever that replacement is eventually sold, assuming it has also appreciated by then. The strategy creates permanent value in only a few specific ways — using the loss against a gain taxed at a higher rate than the eventual offsetting gain, harvesting repeatedly over many years so the deferred liability keeps moving further out, or holding the replacement security until death, when step-up in basis erases the deferred gain entirely. The second surprise is the crypto gap: because digital assets aren’t “securities” under the wash sale statute, an investor can sell a cryptocurrency at a loss and repurchase the identical coin the same day — an outcome the rule was written specifically to prevent for stocks.
Related
Read more: Taxes: How Wealth Is Structured and Preserved · Money Management: From Wealth Manager to Family Office
See also: Direct indexing · Net investment income tax · Step-up in basis