Tax-loss harvesting means selling investments at a loss before December 31 to reduce what you owe in capital gains taxes. Done correctly, it can shave hundreds or thousands of dollars from your bill, but the wash sale rule adds a critical constraint you have to plan around.
How Does Tax-Loss Harvesting Reduce Your Tax Bill?
When you sell an investment at a loss, the loss offsets your capital gains:
- Short-term losses offset short-term gains first; long-term losses offset long-term gains first
- Excess losses cross over to offset the other category
- Any remaining net loss offsets up to $3,000 of ordinary income per year ($1,500 if married filing separately)
- Losses beyond that carry forward to future tax years indefinitely under IRC Section 1211
Example: You realize $15,000 in long-term gains but hold a position sitting at a $10,000 loss. Sell it before December 31 and your taxable long-term gain drops to $5,000.
What Is the Wash Sale Rule?
Under IRC Section 1091, a loss is disallowed if you buy the same or a substantially identical security within 30 days before or after the sale. The window is 61 days total: 30 days before the sale date plus the sale date plus 30 days after.
The rule also reaches:
- Your spouse's brokerage accounts
- IRAs you own (if you rebuy inside an IRA, the loss is permanently forfeited with no future recovery)
- 401(k) automatic purchases that may not appear on your 1099-B
When a wash sale applies in a taxable account, the disallowed loss gets added to the cost basis of the replacement shares. The loss is deferred until you eventually sell those shares. Inside an IRA, there is no basis recovery at all.
Year-end timing note: If you sell on December 15, you cannot rebuy the same security until at least January 15, 2027. The wash sale window does not reset on January 1.
Three Strategies for Year-End Harvesting
Replace With a Similar ETF
Sell the losing position and immediately buy an ETF or fund that tracks a similar index or sector. For example, sell a Vanguard S&P 500 index fund and buy a Fidelity or iShares S&P 500 fund. They track the same benchmark but are not substantially identical under IRS guidance, so the wash sale rule does not apply. You lock in the loss while maintaining market exposure.
Sell and Wait 31 Days
Sell the losing security, hold the proceeds in a money market fund or short-term bond ETF for at least 31 days, then repurchase the original position. This fully avoids the wash sale rule. The risk is missing a price recovery during those 31 days.
Combine Harvesting With Rebalancing
If your portfolio needs rebalancing anyway, harvest losses while you adjust. Sell overweight positions that sit at a loss, then reinvest in underweight asset classes using different securities. You accomplish rebalancing and tax savings in the same trade without any timing risk.
What Tax-Loss Harvesting Cannot Do
A few limits worth knowing:
- No immediate benefit in the 0% bracket. If your income keeps you in the 0% long-term capital gains bracket, there are no gains to offset.
- The $3,000 ordinary income cap is fixed. Congress has not indexed this limit since 1978, and the OBBBA did not change it.
- Losses do not offset IRA or 401(k) distributions. Those distributions are taxed as ordinary income regardless of harvested losses.
- Watch December fund distributions. Many mutual funds pay capital gain distributions in December. Harvest losses elsewhere in your portfolio to offset them.
Key Year-End Deadlines
- December 30, 2026 is typically the last trade date for U.S. equities to settle by December 31 (most U.S. stocks settle one business day after the trade date).
- December 1, 2026 (approximate) is the last date to sell and safely repurchase the same security before year-end without the 31-day rebuy window crossing into 2027.
Questions about year-end investment planning? Contact TS CPA for a free consultation. We respond within the same day.