Tax Loss Harvesting Rules: What It Is and How It Works

What is tax loss harvesting?

Tax loss harvesting means selling an investment at a loss, usually in a taxable account, so the realized loss can offset capital gains and, within limits, other income. The IRS wash-sale rule can disallow the loss if you buy a substantially identical investment within 30 days before or after the sale.

This article is general education, not tax or investment advice. Rules change and individual circumstances matter. Rule descriptions below are as of October 9, 2026, and cite IRS material.

Why people ask about tax loss harvesting rules

Most people searching for the rules want to know three things. What counts as a loss the IRS recognizes? What can undo it? And what happens if the loss is bigger than the gains it offsets?

The sections below walk through each in order. Nothing here is a recommendation to buy or sell anything. Whether harvesting makes sense depends on your tax situation, your holdings, and your goals, and it involves trade-offs that are worth discussing with a tax professional.

Realized gains and losses

A capital gain or loss only exists for tax purposes when you sell. According to the IRS, the difference between your adjusted basis in an asset and the amount you realize from the sale is a capital gain or a capital loss. Generally, basis is what you paid for the asset, and different rules apply to assets received as a gift or inheritance (IRS Topic no. 409).

• A gain occurs when you sell for more than your adjusted basis.
• A loss occurs when you sell for less than your adjusted basis.
• An investment that has dropped in value but has not been sold has an unrealized loss. It does not count on your tax return until you sell.

Short-term versus long-term

The IRS classifies gains and losses by how long you held the asset. Generally, if you hold it more than one year, the result is long-term. If you hold it one year or less, it is short-term. Net short-term capital gains are taxed as ordinary income at graduated rates, while net capital gains may be taxed at lower rates depending on your taxable income (IRS Topic no. 409).

This matters because the type of gain or loss affects how losses are used. Net short-term and net long-term results are figured separately and then combined on Schedule D. Your tax professional can explain how that netting applies to you.

The wash-sale rule

The wash-sale rule is the rule that most often surprises people. Under 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 do any of the following:

• 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
• Acquire substantially identical stock for your IRA or Roth IRA

The IRS also notes that if you sell stock and your spouse or a corporation you control buys substantially identical stock, you have a wash sale (IRS Publication 550, "Wash Sales").

Taken together, the window covers 61 days: the day of the sale, the 30 days before it, and the 30 days after it. Purchases made in a different account can count, including a retirement account, and purchases made through reinvested dividends or automatic investment plans could also fall inside the window.

What happens when a wash sale applies

You cannot deduct the loss at that time. The IRS says the disallowed loss is generally added to the cost of the new stock or securities, which becomes your basis in the new position. That postpones the loss deduction until you dispose of the new position, and your holding period for the new position includes the holding period of what you sold (IRS Publication 550).

What "substantially identical" means

The answer depends on the facts. Publication 550 discusses the concept, including how stock and related contracts, options, and warrants may be treated. This is one of the places where a tax professional's judgment matters most. Because the rule turns on facts and circumstances, similar-looking investments are not automatically safe, and different-looking ones are not automatically covered.

The annual limit and loss carryforwards

If your capital losses are larger than your capital gains for the year, the IRS says the amount of the excess loss you can claim to lower your other income is the lesser of $3,000 ($1,500 if married filing separately) or your total net loss shown on Schedule D (IRS Topic no. 409, as of October 9, 2026).

If your net capital loss is more than that limit, you can carry the loss forward to later years. The IRS points taxpayers to the Capital Loss Carryover Worksheet in Publication 550 or in the Instructions for Schedule D to figure the amount that carries forward (IRS Topic no. 409).

A carryforward is not a refund. It is a loss that may be used in a later year, and whether and when it is useful depends on future gains and income that nobody can predict.

Timing considerations

Timing questions come up often and are worth raising with a tax professional well before year-end.

• Trade date, not settlement date. For securities traded on an established securities market, the IRS says your holding period begins the day after the trade date you bought and ends on the trade date you sold. It cautions against confusing the trade date with the settlement date (IRS Publication 550).
• The wash-sale window crosses year-end. A sale in December can be affected by a purchase in January, and a purchase in early December can affect a sale later in the month.
• Short-term versus long-term status. Selling just before or after the one-year mark can change how a gain or loss is classified.
• Automatic activity. Dividend reinvestment, automatic contributions, and employer stock plans can create purchases you did not plan around.

Limitations and trade-offs

Tax loss harvesting is often described as a way to lower a tax bill. It has limits, and the benefits depend on the individual.

• It may defer taxes rather than eliminate them. Selling at a loss and reinvesting generally lowers the basis of what you hold. A lower basis can mean a larger gain when you eventually sell. The IRS defines gain or loss as the amount realized minus adjusted basis (IRS Publication 550, "How To Figure Gain or Loss").
• It requires gains or income to offset. Without realized gains, the annual deduction limit applies and the rest is carried forward.
• Wash-sale mistakes can disallow the loss. The loss is postponed and may not be usable when you expected.
• Trading has costs. Transaction costs, bid-ask spreads, and the risk that a replacement investment performs differently from the one sold can outweigh a tax benefit.
• Your tax bracket matters. A loss may be worth more or less depending on your income and the type of gain it offsets.
• State rules may differ. State tax treatment of capital gains and losses can vary.
• Investing involves risk. Selling an investment changes your portfolio and its risk. Harvesting should be considered alongside your overall plan, not apart from it.

Recordkeeping

Good records make the rules easier to follow and easier to report accurately.

• Form 1099-B. Your broker reports sales on Form 1099-B. For wash sales, the IRS says box 1g shows the disallowed loss if the securities were covered securities and the substantially identical securities had the same CUSIP numbers and were bought in the same account. However, the IRS says you cannot deduct a loss from a wash sale even if it is not reported on Form 1099-B (IRS Publication 550). That means purchases in other accounts may not appear on the form.
• Form 8949 and Schedule D. The IRS says to report most sales on Form 8949 and summarize them on Schedule D (Form 1040). A wash sale is reported on Form 8949 with code "W" in column (f) and the disallowed loss in column (g) (IRS Topic no. 409 and Publication 550).
• Basis and purchase dates. Keep trade confirmations and statements that show what you paid and when, especially for shares bought at different times and prices.
• Carryforward worksheets. Keep the prior-year Schedule D and carryover worksheet so unused losses can be tracked from year to year.

What to bring to a planning conversation

If you are thinking about harvesting, a short checklist can make a conversation with your tax professional and advisor more productive:

• Your most recent tax return, including Schedule D and any carryover worksheet
• Year-to-date realized gains and losses from each custodian
• A list of taxable and retirement accounts, including accounts held by your spouse
• Purchase dates and cost basis for the positions you are reviewing
• Automatic investing and dividend reinvestment settings
• Equity compensation details, such as RSU vesting dates and employee stock purchase plan dates
• Your expected income for this year and next
• Questions about state taxes

How tax loss harvesting fits into our planning at LKL Advisors

Tax loss harvesting is one of the services we offer, alongside tax strategy and comprehensive financial planning. Where applicable, it is part of how we think about tax-aware investing. Results vary by individual circumstances and may involve trade-offs, and we coordinate with your tax professional rather than replace them.

Some investors pursue harvesting through direct indexing, which holds individual securities instead of a single fund. That can create more positions to track, which makes the wash-sale and recordkeeping rules above more important. Our article on direct indexing: what it is and who it's for covers the benefits and trade-offs in more detail.

Our published fee structure covers planning under one fee, with no account minimums. If you would like to talk through how your accounts fit together, you can reach out here.

Frequently asked questions

What is tax loss harvesting in simple terms?

It is selling an investment at a loss so the loss can be used on your tax return, generally to offset capital gains and then, within limits, other income. The wash-sale rule and the annual limit are the main rules to understand.

How long do I have to wait to buy something back?

The wash-sale rule looks at purchases within 30 days before or after the sale. Which purchases count, and which investments are substantially identical, depends on the facts. Ask a tax professional before you act.

How much loss can I deduct in a year?

After offsetting capital gains, the IRS says the excess loss you can claim against other income is the lesser of $3,000 ($1,500 if married filing separately) or your total net loss. Unused losses can be carried forward (IRS Topic no. 409, as of October 9, 2026).

Does the wash-sale rule apply to my IRA?

It can. The IRS lists acquiring substantially identical stock for your IRA or Roth IRA within the 30-day window as a wash sale (IRS Publication 550). Ask your tax professional how your retirement accounts should be treated.

Is tax loss harvesting right for everyone?

No. It depends on your income, your gains, your holdings, and the costs involved. It may defer taxes rather than eliminate them, and it does not remove investment risk.

Does LKL Advisors give tax advice?

Our planning includes tax awareness, and we coordinate with your tax professional. Questions about how these rules apply to your return belong with a licensed tax professional.

Sources

• IRS, Topic no. 409, Capital gains and losses, accessed October 9, 2026
• IRS, Publication 550, Investment Income and Expenses (2025), accessed October 9, 2026
• IRS, About Form 8949, Sales and Other Dispositions of Capital Assets, accessed October 9, 2026
• IRS, About Schedule D (Form 1040), Capital Gains and Losses, accessed October 9, 2026

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LKL Advisors is based in Atlanta, Georgia, and works with clients across the country, wherever we are registered or otherwise permitted to serve them. Planning is done remotely through secure virtual platforms, so you do not need to be in Atlanta to work with us.