Harvested losses offset gains plus $3,000 of ordinary income — unless a wash sale disallows them. The 30-day rule, the IRA trap, and how to swap funds safely.
Tax-loss harvesting is selling an investment that's down to capture the loss for tax purposes, while keeping your money invested in something similar. The captured loss offsets your capital gains dollar for dollar, then up to $3,000 of ordinary income per year, and anything left carries forward indefinitely. The one rule that can void the whole exercise is the wash-sale rule: buy the same or a "substantially identical" security within 30 days before or after the sale — in any of your accounts, including your IRA — and the loss is disallowed.
Harvesting done right is one of the few genuinely free lunches in taxable investing: same portfolio, same market exposure, lower tax bill. Done carelessly, it's paperwork that accomplishes nothing — or, in the IRA version, permanently destroys the loss. This post covers the mechanics, the wash-sale boundaries, and the swaps that keep you invested. It expands on our pillar covering the best tax planning moves for high-income W-2 employees.
Realized capital losses apply in a strict order:
Example: you harvest $25,000 of losses in a down market. This year you have $12,000 of fund-distribution and rebalancing gains: gone. $3,000 comes off your ordinary income. The remaining $10,000 carries forward — pre-positioned to absorb gains you'll realize later, like unwinding concentrated employer stock or a home-country fund. A loss bank like this is what lets you rebalance or diversify later without a tax bill.
Two caveats keep expectations honest. In a taxable account, harvesting mostly defers tax rather than erasing it — your replacement fund has a lower basis, so there's more gain later (deferral still wins: money now beats money later, rates may differ, and appreciated holdings can eventually pass to heirs or charity with the gain never taxed). And if you're in a low-income year, check whether your long-term gains would fall in the 0% capital gains bracket anyway — burning losses to offset gains that would have been taxed at zero is a pure waste.
A wash sale occurs when you sell a security at a loss and acquire the same or a substantially identical security within 30 days before or 30 days after the sale — a 61-day window centered on the sale date. The "before" half surprises people: buying shares on the 1st and selling an older lot at a loss on the 15th is already a wash. Acquisitions of every kind count — outright purchases, dividend reinvestments (the classic accidental wash), ESPP purchases, RSU vests in the same stock, and even options to buy the security.
When the rule applies, the loss isn't gone in the normal case — it's suspended: the disallowed loss is added to the basis of the replacement shares, and the holding periods combine. You get it back when you eventually sell the replacement lot. Annoying, basis-tracking-intensive, but recoverable — with one brutal exception.
The wash-sale rule applies across all your accounts, not per account. Sell an index fund at a loss in your taxable account while your IRA — or your spouse's account — buys the same fund within the window, and the loss is disallowed. And when the replacement purchase happens in an IRA, the IRS has ruled there's no basis adjustment: the loss isn't suspended, it's permanently destroyed. Nobody sends you a warning — brokers only flag wash sales within a single account, so cross-account washes are yours to catch. Before harvesting, check the automatic investments and dividend reinvestment settings in every account in the household, and pause or redirect any that touch the fund you're selling.
"Substantially identical" isn't precisely defined, but practice has settled into a workable line: the same security or a fund tracking the same index is asking for trouble; a fund tracking a different index covering similar territory is the standard, widely used swap. You keep your market exposure and your loss:
One asset class plays by different rules entirely: under current law there is no wash-sale rule for crypto. Selling at a loss and rebuying immediately is permitted — one of several quirks covered in our 2026 crypto tax guide. Proposals to close this come and go; it's the law as it stands, not a permanent promise.
December-only harvesting misses most of the opportunity. Markets dip in March and August too, and a position can be down 20% mid-year yet finish the year flat — the loss was real and harvestable only for those who acted during the drawdown. A quarterly (or volatility-triggered) review of your taxable lots captures losses when they exist. Year-end is still worth a deliberate pass, though, because harvesting pairs with your other December moves — realizing or deferring gains, and charitable strategies like bunching gifts through a donor-advised fund — where appreciated-share donations solve the opposite problem: positions with big gains you want out of tax-efficiently.
Losses offset gains plus $3,000 of income and carry forward forever — but only if nothing in any household account rebuys the position within 30 days on either side. Watch the IRA above all: a wash there kills the loss for good.
Effective harvesting is a system: review taxable lots through the year, swap into similar-but-not-identical funds, keep dividend reinvestment from washing your own sales, and never let an IRA purchase touch a ticker you're harvesting. The reward is a bank of losses that absorbs gains, trims $3,000 of ordinary income annually, and funds future rebalancing tax-free. Taxagon's CPAs and EAs coordinate harvesting with clients' full-year picture — RSU sales, conversions, charitable moves — as part of ongoing tax planning; if you'd like that lens on your portfolio, reach out.
This article is general information, not tax advice for your specific situation. Tax law changes; figures are for the years stated.
Talk it through with a licensed US tax professional — we'll tell you honestly whether it applies to your situation.
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