Tax-loss harvesting sounds technical, but the core idea is simple: when a taxable investment falls below what you paid for it, you can sell it, lock in the loss for tax purposes, and immediately buy something similar — staying invested while generating a real tax benefit. Done consistently, it can add meaningful after-tax returns without changing your risk exposure.
What changed in 2026
- Capital gains rates held steady. Long-term capital gains rates remain 0%, 15%, or 20% depending on income, with the 3.8% net investment income tax (NIIT) still applying above certain thresholds.
- Automated daily harvesting is now table stakes. Robo-advisors and direct indexing platforms scan for harvest opportunities constantly, making manual-only harvesting look slow by comparison.
- Direct indexing is more accessible. Fractional-share direct indexing at lower minimums (~$20,000–$50,000 at several providers) lets investors harvest individual stock losses inside an index-like strategy.
How the mechanics work
- You buy a fund for $10,000. It drops to $7,500 — a $2,500 unrealized loss.
- You sell it. The $2,500 loss is now realized and usable.
- You immediately buy a similar (not substantially identical) fund to maintain market exposure.
- The loss offsets capital gains, or up to $3,000 of ordinary income this year, with any remainder carried forward.
You reset your cost basis to $7,500. If the new fund later rises back to $10,000+, that gain is deferred until you sell — and if held long enough, taxed at long-term rates.
The wash-sale rule
The IRS prohibits claiming a loss if you buy a "substantially identical" security within 30 days before or after the sale (a 61-day window total). Violating it doesn't destroy the loss — it defers it to the replacement position's cost basis — but kills the current-year tax benefit.
| Swap example |
Wash-sale risk |
| Vanguard Total Market (VTI) → iShares Core S&P Total Market (ITOT) |
Low — different fund, broad market |
| S&P 500 ETF → S&P 500 ETF same provider |
High — arguably substantially identical |
| Individual stock → Same stock |
Definite wash sale |
| US large-cap fund → International developed fund |
None — different market |
When in doubt, move to a fund tracking a different index than the one you sold.
Prioritizing which losses to harvest
Short-term losses (held < 1 year) are more valuable because they offset short-term gains taxed at ordinary income rates (up to 37%). Long-term losses offset long-term gains first (taxed at 0–20%). Harvest short-term losses first when you have both.
How to pick: manual vs automated
| Approach |
Best for |
Typical cost |
| Manual (you watch and sell) |
Occasional big drops; low-cost focus |
Free; your time |
| Robo-advisor auto-harvest |
Consistent, passive harvesting |
0.25–0.40% AUM/yr |
| Direct indexing platform |
High-income, large taxable accounts |
0.20–0.40% AUM/yr |
Manual harvesting is effective during volatile years — set an alert when a position falls 5–10%+ and review. Automation earns its fee for accounts above ~$100,000 in a taxable account with consistent contributions.
Common mistakes
Harvesting in a tax-advantaged account. Losses inside a Traditional IRA, Roth IRA, or 401(k) have zero tax value. Only taxable brokerage accounts benefit.
Reinvesting in the same fund. Buying back the same ETF within 30 days triggers the wash-sale rule. Have your replacement fund identified before you sell.
Forgetting state taxes. Some states don't conform to federal wash-sale rules or tax capital gains differently. Factor in your state rate.
Harvesting small losses. Transaction costs and tracking complexity can outweigh benefits on tiny positions. A rough threshold: harvest if the tax saving exceeds ~$100 for manual investors.
Ignoring the deferred gain. You're not eliminating tax — you're deferring it. The replacement fund has a lower cost basis. The math still usually favors harvesting, but understand what you're doing.
What to skip
- Harvesting in a year when you're in the 0% long-term capital gains bracket — the benefit is minimal; you could instead harvest gains at zero cost.
- Chasing tiny losses near year-end as your only strategy — sustainable harvesting happens throughout the year, especially after drops.
- Complex direct indexing if your taxable account is under ~$50,000 — the fee likely exceeds the tax alpha at that scale.
FAQ
Can I harvest losses every year?
Yes — as long as you have positions with unrealized losses. High-volatility portfolios generate more opportunities.
What if I have more losses than gains?
Net losses up to $3,000 can offset ordinary income annually. Anything beyond that carries forward to future years indefinitely.
Does tax-loss harvesting work in a Roth IRA?
No. All growth and withdrawals in a Roth are already tax-free, so there's no tax event to offset.
How does it interact with the standard deduction?
The $3,000 ordinary income deduction is separate from the standard deduction — it reduces your AGI directly, which can also affect other phase-outs.
Where to go next