A tax loss harvesting strategy means selling investments that are worth less than you paid so the realized losses can offset capital gains, plus up to $3,000 of ordinary income each year, with any unused losses carried forward. Done well, it starts with a projection of your gains for the year, respects the 30-day wash sale rule, and keeps your portfolio aligned with your long-term plan. Done by guesswork in late December, it often saves less than expected or creates a disallowed loss.
Most investors hear about loss harvesting as a year-end tip. Sell the losers, book the deduction, move on. The real opportunity is bigger than that, and so are the traps. The value depends on what kind of gains you have, which tax brackets you are in, whether the 3.8% net investment income tax applies, and what is happening in every account your household owns, including the ones you do not think of as taxable.
Here is how Harness Advisory Platform approaches gains and losses with individual clients each fall, and why the work belongs in November rather than the last week of December.
According to IRS Topic No. 409, capital losses first offset capital gains of the same type. Short-term losses offset short-term gains, and long-term losses offset long-term gains, before either crosses over to the other category. If losses exceed gains for the year, up to $3,000 ($1,500 if married filing separately) can offset ordinary income, and the rest carries forward with no expiration.
The character of your gains matters a great deal. Short-term gains, on assets held one year or less, are taxed at ordinary income rates as high as 37%. Long-term gains are taxed at 0%, 15%, or 20%. For 2026, IRS Revenue Procedure 2025-32 sets the 20% rate to begin above $613,700 of taxable income for married couples filing jointly and $545,500 for single filers, with the 15% rate applying below those levels. A harvested loss that offsets a short-term gain can be worth roughly twice as much as one that offsets a long-term gain taxed at 15%.
Then there is the net investment income tax. Under Section 1411, a 3.8% surtax applies to investment income once modified AGI exceeds $250,000 for joint filers or $200,000 for single filers. Those thresholds are set by statute and are not indexed for inflation, so more households cross them every year. A realized loss reduces net investment income, which means it can save the surtax as well as the capital gains tax.
The wash sale rule disallows a loss if you buy the same or a substantially identical security within 30 days before or after the sale. The disallowed loss is not gone forever. It is added to the basis of the replacement shares, but it does not help you this year, which is usually the whole point.
The rule reaches further than many people expect. IRS Publication 550 explains that purchases by your spouse can trigger it, and IRS Revenue Ruling 2008-5 holds that buying the replacement inside your own IRA or Roth IRA also counts. In that case the loss is permanently lost, because there is no basis adjustment inside a retirement account. Automatic dividend reinvestment is another quiet culprit. A small reinvestment in the same fund within the 61-day window can disallow part of a larger loss.
The common solution is to sell and immediately buy something similar but not substantially identical, such as a fund that tracks a different index in the same asset class. That keeps you invested while the 31-day clock runs. Whether a specific replacement is too similar is a judgment call worth discussing with your investment advisor before you trade.
Yes, and it is one of the most underused moves available. In a year when your taxable income is unusually low (a sabbatical, a gap between jobs, early retirement before Social Security and required distributions begin), you may be able to realize long-term gains at the 0% federal rate. For 2026, that rate applies to taxable income up to $98,900 for joint filers and $49,450 for single filers. The wash sale rule does not apply to gains, so you can sell and repurchase the same investment the same day, resetting your cost basis higher and lowering future taxes.
Gain harvesting also helps in the opposite situation. If you already have large loss carryforwards and plan to diversify a concentrated position, realizing gains against those losses can let you rebalance without a tax bill.
Loss harvesting rarely stands alone. A few related decisions usually belong on the same list.
The following is a fictional example created to illustrate how Harness Advisory Platform would approach this situation. It is not a real client.
James is a senior engineering director at a medical device company in Minnesota. He and his spouse earn about $420,000 a year and hold a taxable brokerage account of roughly $1.4 million, much of it built from vested RSUs. In the spring, on the advice of their investment advisor, they sold part of a concentrated company stock position, realizing a long-term gain of about $180,000. Because their income is well above the net investment income tax threshold, that gain carries the 3.8% surtax on top of the 15% federal rate, and Minnesota taxes capital gains as ordinary income.
In early November, our advisory team works from a year-to-date gain and loss report from each account. Two positions show losses: an intermediate bond fund and an international stock fund, together down about $38,000. Coordinating with their investment advisor, James sells both and buys replacement funds that track different indexes, keeping the overall allocation intact.
The review also catches two problems. James's spouse has dividend reinvestment turned on for the same international fund inside an IRA, which would have triggered a wash sale; reinvestment is switched off before the sale. And the couple had planned a $20,000 cash gift to charity. Instead, they give appreciated company shares to a donor-advised fund, avoiding the gain on those shares altogether.
Finally, the team updates the projection. The harvested losses reduce the capital gain, the net investment income tax, and the Minnesota tax, and the fourth-quarter estimated payment is resized to match. Nothing about the portfolio changed in a way James would notice. The tax outcome did.
Your investment advisor chooses what you own. Your tax advisor should know what those choices cost, before the trades happen, not after the 1099s arrive. Any CPA firm can record history. As your tax advisory partner, we help you build a future by coordinating gains, losses, giving, and estimated payments into one plan.
If you have realized gains this year, a concentrated position you want to unwind, or losses sitting unused in your portfolio, now is the time to plan.
Learn more about individual tax advisory and planning at: https://busadvisory.com/individual-tax-advisory-planning/
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Tax-loss harvesting reduces taxes by realizing investment losses that offset capital gains you already have, plus up to $3,000 of ordinary income per year. Unused losses carry forward indefinitely. For high earners, the loss can also reduce the 3.8% net investment income tax. The benefit is largest when the losses offset short-term gains taxed at ordinary rates.
The wash sale rule disallows a loss if you buy the same or a substantially identical security within 30 days before or after selling it. Purchases by your spouse or inside your IRA can trigger it, and so can automatic dividend reinvestment. A disallowed loss is usually added to the basis of the new shares, but inside an IRA it is lost permanently. Plan replacement purchases before you sell.
Yes, but only after waiting at least 31 days, or the loss will be disallowed. Many investors instead buy a similar but not substantially identical investment right away to stay invested. After the waiting period, they can switch back if they choose. Confirm the replacement with your investment advisor.
Yes, trades must be executed by the last trading day of the calendar year to count for that tax year. In practice, starting in November is better, because it leaves time to coordinate across accounts and avoid wash sales. Late December trades also leave little room to fix mistakes. The trade date, not the settlement date, generally controls.
Harvesting gains makes sense when your taxable income is low enough to qualify for the 0% long-term capital gains rate. For 2026, that applies up to $98,900 of taxable income for joint filers and $49,450 for single filers, so confirm current-year figures before acting. Selling and immediately repurchasing resets your basis higher without triggering a wash sale. It can also make sense when you have loss carryforwards to absorb the gain.
