Tax-loss harvesting is the one investment strategy that makes a down market productive. When a position in your taxable account shows a loss, you can sell it, lock in a deductible loss, and immediately reinvest in a nearly identical fund — staying fully invested while capturing a tax benefit. Robo-advisors charge for this automatically; you can do it yourself for free. Here is how.
What changed in 2026
- Capital gains rates are unchanged — 0%, 15%, and 20% for long-term gains depending on income; 37% top rate for short-term.
- The $3,000 ordinary income offset remains in place and still does not adjust for inflation, making it a fixed but meaningful annual benefit.
- Wash-sale enforcement focus increased — the IRS has signaled closer scrutiny of crypto wash sales and ETF substitutions that are not genuinely dissimilar.
- Low-cost substitute ETFs proliferated — there are now multiple credible swap pairs for every major index, making do-it-yourself TLH practical for most portfolios.
The mechanics in plain English
- You own Fund A in a taxable brokerage account.
- Fund A drops; you now have an unrealized loss (your cost basis is higher than the current price).
- You sell Fund A, realizing the loss — this is now a deductible capital loss.
- You immediately buy Fund B, a similar but not substantially identical fund, with the proceeds.
- You stay invested. The tax loss is banked; your portfolio exposure is nearly the same.
The loss offsets capital gains first, then up to $3,000 of ordinary income. Any remaining loss carries forward to future years with no expiration.
The wash-sale rule: what voids your loss
A wash sale occurs when you sell a security at a loss and buy a "substantially identical" security within 30 days before or after the sale (the 61-day window). If triggered, the loss is disallowed — added to the cost basis of the replacement shares, not eliminated permanently, but deferred.
| Action |
Wash sale? |
| Sell Vanguard Total Market ETF (VTI), buy Schwab Total Market ETF (SCHB) |
No — different fund families, different securities |
| Sell VTI, buy VTI again within 30 days |
Yes |
| Sell VTI, buy VTSAX (Vanguard Total Market mutual fund) |
Likely yes — substantially identical |
| Sell S&P 500 fund, buy a Total Market fund |
Probably not — different benchmark |
| Sell Fund A in taxable, buy same Fund A in your IRA within 30 days |
Yes — IRAs count |
The "same fund in a different account" rule catches people — your IRA, Roth IRA, and spouse's accounts are all in scope.
Good substitution pairs for common positions
| Original holding |
Acceptable swap |
| Vanguard Total Stock Market (VTI) |
iShares Core S&P Total US (ITOT) or Schwab SCHB |
| Vanguard S&P 500 (VOO) |
iShares Core S&P 500 (IVV) or SPDR SPY |
| Vanguard Total International (VXUS) |
iShares Core MSCI Total International (IXUS) |
| Vanguard Total Bond (BND) |
iShares Core US Aggregate Bond (AGG) |
Wait 30+ days, then swap back to your original fund if desired — or stay in the substitute. Both work.
Step-by-step: how to do it yourself
- Review your taxable accounts for positions with unrealized losses (your brokerage shows this).
- Confirm you won't trigger a wash sale — check if you bought the same fund in the last 30 days, and flag any automatic reinvestments (turn off dividend reinvestment before the sale window).
- Calculate if it's worth it. A 0.5% loss on a $1,000 position = $5 saved at a 22% rate. A 15% loss on a $50,000 position = meaningful. Set a threshold — many investors require at least a $500–$1,000 potential loss before bothering.
- Execute the sell. Note the date.
- Immediately buy the substitute in the same account.
- Mark your calendar for the 30-day anniversary if you want to swap back.
- Track your cost basis. Your brokerage does this, but confirm it records correctly.
- Report on Schedule D at tax time. Your brokerage provides the 1099-B with the data.
How losses reduce your taxes
| Situation |
What losses offset |
| You have realized short-term gains |
Short-term losses offset first (same character) |
| You have realized long-term gains |
Long-term losses offset first |
| Losses exceed all capital gains |
Up to $3,000 offsets ordinary income |
| Losses exceed $3,000 over gains |
Remainder carries forward to future years |
Common mistakes
Buying the same fund back within 30 days. The most common error. Set a calendar alert.
Turning off dividend reinvestment too late. A reinvested dividend on the same fund the day before your sale triggers a wash sale. Turn off DRIP before the 30-day window opens.
Ignoring spousal accounts. If your spouse buys the same security within the 30-day window, it's still a wash sale.
Harvesting tiny losses. Transaction costs and time spent do not justify a $20 tax loss. Set a minimum threshold.
Over-harvesting into a different asset allocation. Your substitute should have similar (not identical) market exposure. Do not accidentally shift into bonds when you meant to stay in equities.
What to skip
- Harvesting in tax-advantaged accounts (IRAs, 401(k)s) — losses there have no tax benefit; those accounts are already sheltered.
- Paying a robo-advisor 0.25%/year for automated TLH if you have a simple two- or three-fund portfolio you can monitor yourself.
- Harvesting late November through December without a plan — rushed year-end moves create wash-sale errors when holiday dividends are being distributed.
FAQ
Does tax-loss harvesting hurt long-term returns?
It defers tax, not eliminates it — your substitute fund will have a lower cost basis, meaning a larger gain when you eventually sell. But deferral has real value (the tax money stays invested longer). For long holds or heirs who receive a stepped-up basis, harvesting is very beneficial.
Can I harvest losses on crypto?
Yes — and unlike stocks, crypto currently has no wash-sale rule. You can sell Bitcoin at a loss and immediately rebuy it. Watch for potential rule changes.
What if I have no capital gains to offset?
The loss still applies — up to $3,000 against ordinary income, with the rest carrying forward. Even without current gains, harvesting losses is valuable.
How do I track carryforward losses?
They appear on your Schedule D each year. Your tax software (TurboTax, FreeTaxUSA, etc.) carries them forward automatically as long as you import prior-year data.
Where to go next
See How to do a Roth conversion in 2026, How to start a SEP IRA in 2026, and How to open a Solo 401k in 2026.