Tax-Loss Harvesting: Offsetting Gains, the $3,000 Limit, and the Wash-Sale Rule
October 29, 2026
Tax-loss harvesting means selling an investment that has dropped in value in a taxable account to realize a loss, which can offset taxable gains. In the US, capital losses first offset capital gains of the same type, then the other type; if losses exceed gains, up to $3,000 ($1,500 if married filing separately) can reduce ordinary income each year, and the remainder is carried forward indefinitely.
Suppose you realize a loss of $10,000. You have $6,000 of realized capital gains this year. The loss wipes out the gains ($6,000), then $3,000 offsets ordinary income, and $1,000 is carried forward to next year.
Skip the math and get your answer instantly:
Open the Capital Gains Calculator →Value of the Tax Savings
If the $6,000 of gains were long-term and taxed at 15%, the loss saves $900. The $3,000 deduction against ordinary income at a 24% marginal rate saves $720. The total is $1,620 this year, and the $1,000 carryforward might save another $150 to $240 later. Harvesting doesn't eliminate tax, it defers it: your new lower cost basis means a bigger taxable gain later, unless you hold the investment until death, donate it, or the later gain falls in a lower bracket. The benefit comes from the time value of the deferral and the potential for lower rates, plus using losses to offset high-taxed short-term gains (taxed at ordinary rates up to 37%).
| Step | Amount | Tax effect |
|---|---|---|
| Realized loss | $10,000 | |
| Offsets capital gains | $6,000 | Saves $900 at 15% |
| Offsets ordinary income (limit) | $3,000 | Saves $720 at 24% |
| Carried forward | $1,000 | Used in a later year |
| Total current-year savings | $1,620 |
The Wash-Sale Rule
If you buy a 'substantially identical' security within 30 days before or after the sale (a 61-day window), the loss is disallowed for now and added to the basis of the new shares. This also applies to purchases in your IRA or by your spouse. To maintain market exposure, swap into a similar but not identical investment, such as a different index fund tracking another index, or wait 31 days. Reinvested dividends can trigger partial wash sales.
Practical Tips
Harvest losses in volatile markets or in December, but you can do it anytime. Consider transaction costs and bid-ask spreads. Keep track of the cost basis (brokers report it on Form 1099-B). Automated services (robo-advisors) harvest daily. The strategy doesn't apply to tax-advantaged accounts such as IRAs and 401(k)s. Do not let tax considerations override your investment plan, such as sticking with an asset allocation.
Caveats
Rules vary by country; this article describes the US system. Tax law changes, and state rules differ. Consult a tax professional about your situation. This is educational information, not tax advice.
Frequently Asked Questions
How much can capital losses offset ordinary income?
Up to $3,000 per year in the US, with the rest carried forward.
What is the wash-sale rule?
A loss is disallowed if you rebuy a substantially identical security within 30 days before or after the sale.
Does tax-loss harvesting eliminate tax?
No. It mainly defers it by lowering your cost basis.
Does it work in an IRA?
No, only in taxable accounts.
What can I buy to keep exposure?
A similar but not substantially identical fund.