You can offset unlimited capital gains dollar-for-dollar, then deduct up to $3,000 of leftover net losses against ordinary income each year ($1,500 if married filing separately). Anything beyond that carries forward indefinitely to future tax years, per IRS rules.
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About the Author
Sujit KarkiFinance Researcher & Market Analyst
Independent finance researcher and market analyst with expertise in macroeconomics, equity markets, and personal finance. I help regular investors make better-informed decisions through rigorous, data-driven analysis.
I sell my losers every December, and every December I get the same question from a friend: "isn't that just admitting you screwed up?" No. It's turning a bad trade into a smaller tax bill, and if you've had a rough stretch in 2026 — and a lot of people have, between the tech-concentration wobble and gold's swings — you probably have more of these than you think.
Key Takeaways
You can offset unlimited capital gains with losses, then deduct up to $3,000 of any leftover loss against ordinary income each year.
Anything above that $3,000 cap doesn't disappear — it carries forward to next year, and the year after, indefinitely.
The wash-sale rule voids the loss if you buy the same or a substantially identical security within 30 days before or after the sale.
Crypto is property, not a security, so the wash-sale rule doesn't clearly apply to it as of 2026 — but the IRS hasn't said that in writing, either.
The deadline that matters is December 31 for the trade to settle in the current tax year, not April 15.
What actually happened
Nothing "happened" in the news-event sense — this is a strategy, not a headline. But the reason it's worth writing about in September rather than March is that searches for it spike hard every Q4, and 2026 has given a lot of taxable-account investors real losses to work with. Gold cracked after its run-up. Big tech's concentration in index funds has made portfolios more volatile than the S&P 500 headline number suggests. If you bought individual names or sector funds this year and some of them are underwater, harvesting isn't a consolation prize — it's a mechanical way to lower what you owe the IRS, and it costs you nothing except the admin of selling and rebuying something similar.
The rule itself isn't new. What changes year to year is the deduction cap staying fixed at $3,000 while everything else — asset prices, portfolio sizes, inflation — moves around it. That $3,000 number was set decades ago and has never been indexed for inflation, so its relative value has shrunk. It's still worth claiming. It's just not the windfall it might have felt like when it was written into law.
Max ordinary-income deduction$0Per year; $1,500 if married filing separately
Wash-sale window0Days: 30 before the sale, the sale day, 30 after
The math for one person
Say you've got $5,000 in long-term gains from a fund you sold in the spring, and a stock position that's down $10,000 since you bought it. Sell the loser before December 31, and here's the sequence the IRS actually applies:
Net your losses against gains of the same character first — short-term against short-term, long-term against long-term.
Then let leftover losses of either type offset gains of the other type. A long-term loss can absorb a short-term gain and vice versa.
If you still have loss left after wiping out every gain, up to $3,000 of it comes off your ordinary income — the income taxed at your regular marginal rate, which is usually higher than the capital-gains rate the loss would otherwise have offset.
Anything past $3,000 carries forward to next year, where it goes through the same three steps again.
In this example, the $10,000 loss wipes out the $5,000 gain entirely, leaving $5,000 of net loss. $3,000 of that reduces your taxable ordinary income this year; the remaining $2,000 carries into 2027. If your marginal rate is 24%, that $3,000 deduction is worth $720 in real tax savings — on top of whatever the gain offset already saved you.
Pro Tip
The order matters more than people think. If you have both short-term and long-term losses available and only need to offset a specific gain, harvest the short-term loss first when you have a choice — it would otherwise be taxed at your higher ordinary rate if left unrealized as a gain, so preserving long-term-loss carryforward for future short-term gains is usually the better trade.
The trap almost everyone half-remembers but gets wrong in the moment is the wash-sale rule. If you sell a stock at a loss and buy the same stock — or something the IRS considers "substantially identical," which is a fuzzier standard than most people assume — within 30 days before or after that sale, the loss is disallowed. Not deferred nicely; disallowed, with the loss amount tacked onto the cost basis of your replacement shares instead. The window is 61 days total: 30 days before, the day of sale, and 30 days after. A lot of people accidentally trigger this because a scheduled dividend reinvestment plan (DRIP) rebuys the same stock automatically the week after they sold it for a loss. Check your DRIP settings before you harvest.
Crypto is the interesting exception. The IRS classifies cryptocurrency as property rather than a security, and as of 2026 it hadn't issued definitive guidance stating that the wash-sale rule applies to crypto sales. In practice, that means a lot of crypto investors sell a coin at a loss and buy it right back the same day, something you legally cannot do with a stock. This isn't a rumor — it follows directly from how the IRS has classified the asset class — but "no rule yet" isn't the same as "permanently exempt." Congress has floated closing this gap before, and if it does, the change would presumably apply going forward, not retroactively. Don't build a whole strategy around a gap that could close with the next budget bill.
The case against
The obvious pushback: if you sell a loser and don't buy something similar back within 30 days, you're out of the market for a month, and markets have had some sharp one-week rallies in 2026. Missing one of those to preserve a tax deduction can cost more than the deduction is worth, especially in a smaller taxable account where the tax savings amount to a few hundred dollars. There's also a practical floor — if you're already in the 12% ordinary bracket and 0% long-term capital-gains bracket, this whole exercise saves you very little, because there's not much tax to offset in the first place.
The other honest caveat: harvesting works best with genuinely fungible substitutes — sell one S&P 500 fund, buy a different S&P 500 fund from another provider, and you've kept your market exposure while banking the loss. It works far less cleanly with a single stock you actually believe in long-term, where there's no "substantially different but similar enough" substitute and you either eat the 30-day gap or skip the harvest.
Scenario
Worth harvesting?
Why
Index fund down 8%, easy substitute exists
Usually yes
Swap to a different index fund tracking the same benchmark; no 30-day gap in market exposure
Single stock you still want to hold long-term
Maybe not
No clean substitute — you'd be out of that specific position for 30+ days
Loss is under a few hundred dollars
Rarely worth the effort
Tax savings at most brackets won't cover the time and transaction friction
Held in a 401(k) or IRA
No
Tax-loss harvesting only applies to taxable brokerage accounts — retirement accounts don't recognize gains or losses annually
Run your own numbers
Interactive · tax-loss harvesting
What harvesting your losses actually saves you
Short-term gains$4,000
Long-term gains$5,000
Short-term losses to harvest$10,000
Long-term losses to harvest$0
Marginal tax rate24%
Long-term capital gains rate15%
Harvesting these losses cuts your federal tax bill from $1,710 to $0 — a savings of $0.
Tax-loss harvesting estimate — data table
Ordinary-income deduction claimed
$1,000
Loss carried forward to next year
$0
Estimated tax saved
$1,950
Simplified federal-only model — ignores state taxes, the net investment income tax, AMT, and the 30-day wash-sale rule, which can disallow a loss entirely if you repurchase a substantially identical security. Estimate only — not tax advice.
The carryforward is the part people forget to plan around. A $20,000 loss you can't use all at once doesn't vanish — it just takes years to fully absorb at $3,000 a year, assuming you don't have future gains to soak it up faster.
If you also have gains in other years, the carryforward gets used up faster — it offsets those first, before ever touching the $3,000 ordinary-income cap. That's actually the best-case use of a big harvested loss: it's a standing credit against whatever you sell for a gain down the road, index-fund rebalancing included.
For the specific mechanics of tracking cost basis on crypto trades, where this gets messier than stocks, see my crypto 1099-DA cost basis guide. If you're building the taxable side of a portfolio in the first place, the index fund investing guide covers picking funds you can swap between cleanly. And if you're weighing whether bonds belong in the mix you're harvesting around, see the fixed-income sleeve for 2026.
Here's What I'd Actually Do
Pull your 2026 realized and unrealized gains/losses now, not in late December. Waiting until the last week of the year means rushed decisions and settlement-date mistakes.
Sort losers into "has an easy substitute" and "doesn't." Harvest the first group without much hesitation; think harder about the second.
Set a calendar reminder 31 days out before repurchasing anything you sold at a loss — and double-check any automatic dividend reinvestment isn't about to violate the window for you.
Don't let the tax tail wag the investment dog. A few hundred dollars of tax savings isn't a reason to sell a position you'd otherwise hold for a decade.
If you harvest crypto losses without waiting 30 days, know you're relying on a guidance gap, not a guaranteed rule — and keep records in case that changes.
Track carryforward losses year to year. Your tax software should do this automatically, but confirm the number on Schedule D matches what you expect before filing.
FAQ
Frequently Asked Questions
You can offset unlimited capital gains dollar-for-dollar, then deduct up to $3,000 of leftover net losses against ordinary income each year ($1,500 if married filing separately). Anything beyond that carries forward indefinitely to future tax years, per IRS rules.
Warning
This post explains a general federal tax mechanism, not your personal tax situation. State tax treatment varies, the wash-sale rule's "substantially identical" standard is genuinely ambiguous in edge cases, and crypto guidance can change. Talk to a tax professional before executing a harvest near a filing deadline.
Sujit Karki||7 min read