Margin notes
- If capital losses exceed gains, you can deduct the lesser of $3,000 ($1,500 married filing separately) or your net loss against other income, according to IRS Topic 409.
- Unused net capital losses carry forward to later years.
- A wash sale occurs if you buy substantially identical stock or securities within 30 days before or after selling at a loss, IRS Publication 550 says.
Nobody likes a losing investment, but the tax code gives it a consolation prize. A loss you actually realize by selling can cancel out taxable gains and, within limits, reduce tax on your wages. Wealthy investors do this every year as routine maintenance. The same rules apply to a small brokerage account.
The rules in three steps
IRS Topic 409 sets out the order:
- Capital losses first offset capital gains. Long-term results are combined with long-term, short-term with short-term, and the two totals are then netted.
- If losses are larger than gains, you can deduct the excess against other income, up to the lesser of $3,000 ($1,500 if married filing separately) or your total net loss.
- Any net loss above that limit carries forward to later years, where it can offset future gains or another $3,000 of income.
A worked example
Say you sold a fund this year for a $6,000 long-term gain. Another holding is down $10,000 from what you paid. If you sell it too, the numbers work like this:
| Step | Amount |
|---|---|
| Long-term gain from the first sale | $6,000 |
| Loss from the second sale | -$10,000 |
| Net capital loss for the year | -$4,000 |
| Deducted against wages or other income this year | -$3,000 |
| Carried forward to next year | -$1,000 |
Without the second sale, the $6,000 gain would be taxable, at 15% for many investors, or 0% if your taxable income falls within the 0% band described in Capital Gains Tax Basics: Short-Term, Long-Term and the 0% Rate. With it, the gain disappears, $3,000 of ordinary income is offset at your regular rate, and $1,000 is saved for next year.
Short-term losses are worth the most
Net short-term gains are taxed as ordinary income, according to the IRS, while long-term gains usually get lower rates. A loss that offsets a short-term gain therefore saves tax at your ordinary rate, which for 2026 runs up to 37%. When choosing which losing positions to sell, the holding period matters as much as the size of the loss.
The wash sale rule
The rule that trips people up is in IRS Publication 550. A wash sale occurs when you sell or trade stock or securities at a loss and, within 30 days before or after the sale, you:
- 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, or
- Acquire substantially identical stock for your IRA or Roth IRA.
If the rule applies, the loss is disallowed for now. Publication 550 says you add the disallowed loss to the cost of the new shares, which becomes your basis in them, except in the IRA case. The window runs in both directions, so it covers a 61-day period around the sale.
The IRA exception matters. Publication 550 excludes the case where you buy the replacement shares in your IRA or Roth IRA from the rule that adds the disallowed loss to the new shares’ basis. In other words, selling at a loss in a taxable account and buying the same fund in an IRA within the window can leave you without the loss and without the basis increase.
Tip: Automatic reinvestment of dividends can create an accidental wash sale: if a fund you sold at a loss reinvests a dividend into the same fund in your other account within the window, part of the loss can be disallowed. Check reinvestment settings before harvesting.
Staying invested
Investors who want to harvest a loss but keep money in the market either wait until the 30-day window has passed before buying back, or buy a different investment that is not substantially identical. Whether two securities are substantially identical depends on the facts, so if you are unsure, a tax professional can review the specific holdings.
When harvesting does not help
- Inside a 401(k) or IRA. Gains and losses in tax-advantaged accounts are not reported each year, so there is nothing to harvest; see Retirement Accounts and Taxes: 401(k), Traditional IRA and Roth IRA in 2026.
- When your gains would be taxed at 0% anyway. Using a loss to cancel a gain that would not be taxed wastes it, although the $3,000 offset against other income can still help.
- When fees or spreads on selling and buying outweigh the tax benefit.
Reporting
Sales are reported on Form 8949 and summarized on Schedule D of Form 1040, the IRS says. Publication 550 and the Schedule D instructions include a Capital Loss Carryover Worksheet for tracking losses carried forward from earlier years.
Loss harvesting is one of the routine moves behind How the Wealthy Reduce Taxes Legally, and the Versions You Can Use. It works best as a year-end habit: review positions in November and December, before the tax year closes.