Can I harvest losses in a tax-advantaged account like an IRA?

No. Tax-loss harvesting only works in taxable brokerage accounts. Gains and losses inside an IRA or 401(k) are not reported to the IRS — there is no taxable event until you withdraw funds. The strategy has no benefit and does not apply within tax-sheltered accounts.

What is specific lot identification and how does it improve tax-loss harvesting?

Specific lot identification allows you to choose which shares you sell when you have multiple purchase lots at different prices. By selecting lots with the highest cost basis (biggest unrealized losses), you maximize the harvest amount. Most brokers offer this selection at trade execution. The alternative (average cost or FIFO) may produce smaller harvestable losses from the same position.

Does tax-loss harvesting defer taxes or eliminate them?

Primarily defers. When you harvest a loss and reinvest in a similar asset, your new cost basis is lower than it would have been if you never harvested. When you eventually sell the replacement asset, the gain will be larger (reflecting the lower basis). However, if the future sale occurs at a lower rate (long-term vs short-term) or in a lower-income year, deferral has real value beyond mere timing.

Can the wash sale rule affect losses in my IRA?

Yes. If you sell a security in a taxable account at a loss and repurchase substantially identical securities in your IRA within 30 days, the wash sale rule applies and the loss is permanently disallowed — not just deferred. The IRA purchase counts for wash sale purposes. This is a common trap for investors who are contributing to IRAs and trading in taxable accounts simultaneously.

How much can I deduct in capital losses against ordinary income?

Up to $3,000 per year in net capital losses can be deducted against ordinary income (wages, business income, etc.). Net losses above $3,000 carry forward to future years. For married filing separately: the limit is $1,500 per spouse. The carryforward losses retain their short or long-term character and are used in future years following the same netting rules.

Tax-Loss Harvesting: The Complete Guide to Offsetting Capital Gains

Tax-loss harvesting is one of the most powerful legal strategies for reducing capital gains taxes — and it requires no change in your long-term investment strategy. By selling positions at a loss and immediately reinvesting in similar (but not identical) assets, you realize the tax benefit of a loss without meaningfully changing your portfolio exposure. This guide covers every aspect of executing the strategy correctly.

How Tax-Loss Harvesting Works

Tax-loss harvesting works in three steps: (1) Identify positions in your portfolio that are currently worth less than you paid for them (unrealized losses). (2) Sell those positions to realize the loss. (3) Immediately reinvest in a similar — but not substantially identical — investment to maintain your market exposure. The realized loss offsets your capital gains (or ordinary income up to $3,000) for the year.

Tax-loss harvesting scenarios and savings

Scenario	Capital Gains	Harvested Losses	Net Taxable Gain	Tax Savings (at 15% LT rate)
Simple offset	$20,000	$12,000	$8,000	$1,800 saved
Full offset	$15,000	$18,000	$0 + $3K ordinary income deduction	$2,250 + $660 ordinary income
Loss carryforward	$5,000	$25,000	$0 + $20K carried forward	$750 now + future savings
Short-term offset	$10,000 ST gains	$10,000 ST losses	$0	$3,700 saved at 37% rate

The Wash Sale Rule: The Critical Restriction

The IRS wash sale rule disallows a loss deduction if you purchase a substantially identical security within 30 days before or after the sale that generated the loss. The rule creates a 61-day window (30 days before, the day of sale, 30 days after) during which you cannot repurchase the same security without losing the tax deduction.

⚠️What Triggers the Wash Sale Rule

Selling Apple stock at a loss and buying Apple stock back within 30 days: wash sale. Selling an S&P 500 index fund and buying another S&P 500 fund from a different provider: likely a wash sale (substantially identical). Selling an S&P 500 fund and buying a total US market fund: not a wash sale (different index, different holdings). The rule catches many automatic dividend reinvestment situations — review carefully.

What to Buy After Harvesting a Loss

Sell: Vanguard S&P 500 ETF (VOO) → Buy: iShares S&P 500 ETF (IVV) — different fund, same index
Sell: Vanguard Total Stock Market (VTI) → Buy: Schwab Total Market (SCHB) — similar but not identical
Sell: Individual stock → Buy: ETF containing that sector — not substantially identical
Sell: Small-cap growth fund → Buy: different small-cap growth fund from another provider
Wait 31 days and buy back the original fund — after the wash sale window expires
Never: Sell a fund and rebuy the same fund — guaranteed wash sale regardless of share class
Be careful with: Mutual fund and ETF versions of same index — may be substantially identical

Year-End Tax-Loss Harvesting Timing

The most active tax-loss harvesting window is October through December. By October, you have a clear picture of your capital gains for the year and can identify the harvest amount needed to offset them. December 31 is the hard deadline — losses must be realized by year-end. Allow sufficient time for trades to settle (typically T+2 business days) before year-end.

Calculate Your Tax-Loss Harvesting Benefit

Enter your current capital gains and potential harvest losses to see the tax savings from strategic loss realization.

Open Capital Gains Tax Calculator →

Tax-Loss Harvesting: The Complete Guide to Offsetting Capital Gains

How Tax-Loss Harvesting Works

The Wash Sale Rule: The Critical Restriction

What to Buy After Harvesting a Loss

Year-End Tax-Loss Harvesting Timing

Frequently Asked Questions

Frequently Asked Questions

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