IRC §1211, IRC §1212, IRC §1091 (wash sale rule)
Tax-Loss Harvesting
Tax-loss harvesting sells investments at a loss to offset capital gains and up to $3,000 of ordinary income per year. Unused losses carry forward indefinitely.
The mechanics span multiple years and accounts: when you sell at a loss, your cost basis resets lower, so future gains on a replacement position are larger. The wash sale rule disallows the loss if you (or your spouse, or your IRA) buy a substantially identical security within 30 days before or after the sale — this catches more people than expected because it applies across all accounts, not just the one where the sale happened.
The strategy reduces this year’s tax while shifting some of that tax into future years via the lower basis.
Who this may apply to
- Have investment accounts with gains or losses
- Own taxable brokerage accounts
- Have flexibility on when to realize gains
Strategy connections
Works well with
- Cryptocurrency Tax Planning: Digital-asset losses require asset-specific wash-sale and reporting analysis.
- Qualified Opportunity Zone (QOZ) Investment: Realized gains and losses affect the amount of gain potentially eligible for a QOF investment.
What could block this
- No taxable investment account
- No usable unrealized loss
- Wash-sale or replacement-investment constraints eliminate the intended loss
Important considerations
- The wash sale rule disallows the loss if you buy the same or substantially identical security within 30 days before or after the sale — in an IRA or a spouse’s account counts too
- Harvesting losses to offset gains is valuable, but don’t let the tax tail wag the investment dog — only harvest if you’d hold the replacement security anyway
- Short-term losses (assets held under 1 year) first offset short-term gains; long-term losses offset long-term gains. The ordering affects your effective tax rate
- Washington State residents: WA imposes a 7% capital gains excise tax on long-term gains above $262,000 (2026). Tax-loss harvesting reduces this WA liability in addition to the federal savings — particularly high-value for WA residents with large realized gains.
- Some states offer preferential capital gains treatment: Wisconsin excludes 30% of long-term gains, South Carolina excludes 44%, Montana offers a 20% net capital gain deduction. Residents of these states have a somewhat lower urgency to harvest short-term losses but still benefit from offsetting gains.
- Most states tax capital gains as ordinary income at their regular income tax rate — your full combined federal + state rate is what determines the true savings from harvesting.
Professional support
Financial Advisor + Tax CPA
Will coordinate investment decisions with tax implications and implement systematic tax-loss harvesting.
Timing
Tax-loss harvesting is most impactful done throughout the year. December is the last opportunity for the current tax year — sales must settle before December 31.
Official sources
Reviewed 2026-07-24