Tax-Loss Harvesting: Turning Market Dips into Tax Savings
What Is Tax-Loss Harvesting?
Tax-loss harvesting is selling an investment that has dropped below what you paid for it, so the loss can offset capital gains or part of your ordinary income on your tax return. You then reinvest the proceeds so your money stays in the market and your plan stays on track.
A down year typically doesn’t feel like an opportunity. But a loss you realize on purpose can potentially lower this year’s tax bill, and any unused amount can generally carry forward to future years. Tax-loss harvesting serves as an example of how a portfolio and tax plan can work together.
In this article, we’ll cover how tax-loss harvesting works, the wash-sale rule that tends to trip up some investors, who generally benefits most, and why timing matters as December 31 approaches.
How Tax-Loss Harvesting Works
The mechanics of tax-loss harvesting are generally straightforward. The value comes from doing those mechanics in the correct order and in the proper accounts.
- Find positions with unrealized losses. Look only in taxable brokerage accounts. Losses inside IRAs, 401(k)s, and other tax-deferred accounts can’t be deducted.
- Sell to realize the loss. The loss is “harvested” once the trade date falls in the tax year.
- Net losses against gains. Short-term losses first offset short-term gains, and long-term losses offset long-term gains. Any excess then crosses over to the other type.
- Deduct what’s left against ordinary income. If losses exceed gains, you can generally deduct up to $3,000 a year against other income ($1,500 if married filing separately).
- Carry the rest forward. Unused capital losses generally carry forward indefinitely to offset future gains and income.
- Reinvest the proceeds. Buy a similar, but not substantially identical investment so your allocation stays where your plan wants it.
It’s important to understand that harvesting usually defers tax rather than erasing it. The replacement investment starts with a lower cost basis, so more of its future growth may be taxable when you sell. The benefit is largest when you defer to a year with a lower rate or hold the investment long enough to pass it on with a step-up in basis.
For 2026, long-term gains are taxed at 0% for single filers with taxable income up to $49,450 ($98,900 married filing jointly), 15% above that, and 20% above $545,500 ($613,700 jointly).
What Is Tax-Gain Harvesting?
We also want to briefly explain tax-gain harvesting, Tax-gain which is the inverse of tax-loss harvesting. It involves selling investments that have increased in value to harvest capital gains, typically when those gains can be recognized at a low (potentially 0%) tax rate.
We’re going to continue focusing on tax-loss harvesting in this article, but to learn more about tax-gain vs. tax-loss harvesting and other key considerations about tax on investments, download our Tax Reduction Strategies guide.
Download: Tax Reduction Strategies
Who Benefits from Tax-Loss Harvesting
Tax-loss harvesting tends to help most when there are gains to offset or income taxed at a higher rate. It’s generally worth a look if you:
- Hold significant assets in taxable brokerage accounts, not only in retirement accounts
- Realized capital gains this year from selling a business, property, company stock or a concentrated position
- Are in a higher tax bracket now than you expect to be later
- Are rebalancing anyway and can pair the trades with a harvest
It may add little if most of your savings sit in IRAs and 401(k)s, or if your income already falls in the 0% long-term capital gains bracket. In that case, tax-gain harvesting may be the better fit.
Tax-Loss Harvesting in Retirement
If you’re retired or nearing retirement, harvested losses can potentially do more than lower one year’s bill. They can help keep income below thresholds that affect other costs, such as Medicare IRMAA surcharges and how much of your Social Security is taxed. A loss carryforward can also soften the tax cost of selling appreciated investments to fund retirement income or a Roth conversion.
These pieces interact, so it helps to look at them together in one plan. Get started by completing your Modern Confidence Score, which can help our team understand how confident you are not only with taxes and investments, but estate and insurance as well.
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Understanding the Wash-Sale Rule
There are some common mistakes to avoid when tax-loss harvesting. One of the most typical mistakes is the wash-sale rule, which disallows a loss if you buy the same or a substantially identical security within 30 days before or after the sale.1 That makes a 61-day window around every harvested loss. Here are a few points that tend to catch people off guard:
- It applies across your accounts. A repurchase in your IRA can trigger a wash sale on a loss in your taxable account. So can a purchase in your spouse’s account.
- Automatic purchases count. Reinvested dividends and scheduled contributions that buy the same fund inside the window can trigger the rule.
- The loss isn’t gone, just postponed. In most cases, a disallowed loss is added to the cost basis of the replacement shares. The exception is a repurchase inside an IRA, where the loss can be lost for good.
How Investors Stay Invested without a Wash Sale
The usual approach is to swap into an investment with a similar role in the portfolio but a different underlying holding or index. For example, an investor might move from one large-company index fund to another fund that tracks a different large-company index. Another option is to wait 31 days and buy back the original position, accepting the time out of the market.
What counts as “substantially identical” isn’t fully defined in the tax code. Consult a tax professional to help you judge a specific swap.
Tax-Loss Harvesting with an Advisor
Doing this yourself means tracking cost basis by tax lot, watching the 61-day window across every account in the household, and choosing replacements that keep your investment management strategy intact. An advisor can review accounts throughout the year, not just in December, and coordinate harvesting with a CPA and the rest of your tax planning.
Other Common Tax-Loss Harvesting Mistakes
- Letting the tax tail wag the dog. Selling a holding you’d otherwise keep, only for the deduction, can pull a portfolio away from its plan.
- Triggering a wash sale by accident. Dividend reinvestment, a spouse’s account or an IRA purchase can undo the loss.
- Forgetting about short-term gains in the replacement. If you switch back to the original holding within a year, any gain on the replacement is short-term and taxed at ordinary rates.
- Ignoring transaction costs and spreads. Small losses may not be worth the trading costs to harvest.
- Harvesting in the wrong account. Losses inside IRAs and 401(k)s don’t produce a deduction.
- Losing track of carryforwards. Unused losses need to be reported each year on your return so they aren’t left on the table.
When to Harvest: Year-End and Year-Round
To count for the 2026 tax year, a sale generally needs a trade date on or before December 31, 2026. Waiting until the last week can mean thin trading, a rushed choice of replacement, and a 30-day wash-sale window that runs into January.
Year-end isn’t the only chance, though. Markets often dip mid-year and then recover. Reviewing taxable accounts after sharp declines can capture losses that are gone by December.
Tax-Loss Harvesting FAQs
Q: Is tax-loss harvesting worth it?
It can be when you hold taxable investments with losses and have gains or higher-taxed income to offset. Its value depends on your tax rates now and later, how long you hold the replacement, and trading costs.
Q: How much can I deduct from tax-loss harvesting?
Losses offset capital gains without a dollar limit. Beyond that, you can generally deduct up to $3,000 a year against ordinary income ($1,500 if married filing separately) and carry the rest forward.
Q: Does the wash-sale rule apply to IRAs?
Yes. Buying a substantially identical security in an IRA within 30 days of selling it at a loss in a taxable account can trigger a wash sale. In that case, the loss is generally not added to the IRA’s basis, so it may be lost.
Q: Can I harvest losses in a 401(k) or IRA?
No. Gains and losses inside tax-deferred accounts aren’t reported each year, so selling at a loss there doesn’t create a deduction.
Q: What’s the difference between tax-loss harvesting and tax-gain harvesting?
Tax-loss harvesting realizes losses to offset gains and income. Tax-gain harvesting realizes gains on purpose, often in a year when they fall in the 0% long-term capital gains bracket, to reset cost basis higher.
Make Your Losses Part of the Plan
At Modern Wealth Management, tax-loss harvesting is one part of a broader plan, coordinated across your investments, your taxes and your retirement income. Each client works with an advisor backed by specialists in tax, estate planning, investments, and insurance.
But before we can assess whether tax-loss harvesting makes sense for you, we need to understand your life circumstances, goals, and how confident you are across each of those areas. It’s our goal to build you a plan that helps you enjoy today, prepare for tomorrow, and connect with the people and causes you care about most. Get started by completing your Modern Confidence Score, and our team will be in touch with next steps.
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Resources Mentioned in This Article
[1] https://www.investor.gov/introduction-investing/investing-basics/glossary/wash-sales
Investment advisory services offered through Modern Wealth Management, LLC, a registered investment adviser.
The views expressed represent the opinion of Modern Wealth Management, LLC, a registered investment adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.
Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action. Before investing, consider investment objectives, risks, fees, and expenses. Investments in securities involve the risk of loss, including loss of principal. Past performance is no guarantee of future returns. The views and opinions reflected in the content are subject to change at any time without notice. The content speaks only as of the date indicated. Some information was obtained from external sources. The information is believed to be accurate, but there is no guarantee that it is.
Tax-gain harvesting strategies may not be appropriate for all investors. The potential tax benefits depend on individual circumstances, including income, tax brackets, holding periods, and applicable federal and state tax laws. Realizing capital gains may result in additional tax liabilities or affect eligibility for certain tax benefits. Investors should consult a qualified tax professional before implementing tax-related investment strategies.
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