Tax-Loss Harvesting 101: How to Use Losses to Offset Gains

This article is general information only. It’s not investment, tax, or legal advice. Tax-loss harvesting can interact with the wash sale rule, retirement accounts, options, and your overall investment plan. Always coordinate with a qualified tax professional and, if you have one, your financial advisor before acting.

If you’re still getting comfortable with the basics, it can help to read these alongside this guide: What Is Capital Gain and Loss? and Short-Term vs Long-Term Capital Gains .

First: what is tax-loss harvesting, really?

At its core, tax-loss harvesting is a two-step idea:

1. You sell investments in a taxable account that are currently worth less than what you paid.
2. You use those realized capital losses to offset capital gains and, in some cases, reduce a portion of your ordinary income.

The strategy doesn’t change the fact that your investment lost money. What it does is try to make the tax system acknowledge that loss in a way that softens the blow.

How capital gains and losses are calculated

Every time you sell an investment in a taxable account, the IRS cares about one simple comparison:

• Proceeds – what you sold it for, and
• Basis – generally, what you paid for it (plus certain adjustments).

If your proceeds are higher than your basis, you have a capital gain.
If your proceeds are lower than your basis, you have a capital loss.

Short-term vs long-term

The tax code also looks at how long you held the investment:

• Short-term: Held for one year or less. Gains are usually taxed at ordinary income tax rates.
• Long-term: Held for more than one year. Gains typically receive preferential long-term capital gain rates.

Losses keep their character too — you can have short-term losses and long-term losses. That matters when we start matching gains and losses.

How the IRS nets your gains and losses

At the end of the year, the IRS doesn’t look at each trade in total isolation. Instead, it follows a netting process:

1. Net your short-term gains and losses.
   Result: overall short-term gain or loss.
2. Net your long-term gains and losses.
   Result: overall long-term gain or loss.
3. Net the two results against each other.
   For example:
   • Short-term gain of $5,000 and long-term loss of $7,000 = net capital loss of $2,000.
   • Short-term loss of $3,000 and long-term gain of $10,000 = net capital gain of $7,000.

Tax-loss harvesting is about deliberately generating losses at the right time so that this netting process works in your favor.

The $3,000 ordinary income offset and carryforwards

What if, after all that netting, you still have more losses than gains?

• Each year, you can generally use up to $3,000 of excess net capital loss ($1,500 if Married Filing Separately) to offset ordinary income.
• Any remaining unused capital loss is carried forward to future years until it’s used up.

Example:

• You end 2025 with a net capital loss of $12,000.
• You use $3,000 to offset ordinary income on your 2025 return.
• You carry forward the remaining $9,000 into 2026 and later years.

Basic example of tax-loss harvesting

Imagine this simple scenario in a taxable brokerage account:

• You have a long-term gain of $10,000 from selling Investment A.
• You’re sitting on an unrealized long-term loss of $6,000 in Investment B.

If you do nothing, your tax return shows a long-term gain of $10,000.

If you harvest the loss by selling Investment B before year-end:

• Your long-term gain of $10,000 is offset by the harvested long-term loss of $6,000.
• You end up with a net long-term gain of $4,000 instead of $10,000.
• You’ve reduced the amount of gain exposed to capital gains tax.

If you have no other gains and your harvested losses exceed them, that’s when the $3,000 ordinary income offset and carryforward rules come into play.

But what about staying invested? (Enter the wash sale rule)

Many investors don’t want to be out of the market just to harvest a loss. They want to:

• Sell an investment that’s down,
• Capture the loss for tax purposes, and
• Stay invested in something similar so they don’t miss a rebound.

That’s where the wash sale rule becomes critical. If you sell at a loss and then buy the same or substantially identical investment within the 61-day wash sale window (30 days before and 30 days after the sale), your loss can be disallowed in the current year and added back to basis instead.

If you haven’t read it yet, start with this primer:

What Is the Wash Sale Rule? A Simple Guide for Everyday Investors

In a follow-up article, we’ll go deeper on how tax-loss harvesting and the wash sale rule interact and how to avoid common mistakes:

Wash Sale Rule vs Tax-Loss Harvesting: How They Work Together (and Against You)

When tax-loss harvesting can make sense

In practice, harvesting can be especially useful when:

• You realized large capital gains this year (for example, from selling a business, rental, concentrated stock position, or highly appreciated fund).
• Your portfolio has clear losers that no longer fit your long-term plan anyway.
• You’re in a higher tax bracket now than you expect to be in later.
• You want to build a bank of capital losses to help manage future gains.

On the other hand, harvesting just because “everyone on the internet is doing it” can lead to:

• Unnecessary trading costs or bid/ask spread slippage.
• Accidental wash sales that undo the benefit you were chasing.
• A portfolio that drifts away from the risk level you actually want.

Common mistakes I see with DIY harvesting

Working with investors around Sugar Land, Fort Bend County, and the Houston area, a few patterns show up over and over:

• Harvesting without a plan. Selling something just because it’s down, with no clear idea what you’ll buy instead or how it fits your allocation.
• Ignoring the wash sale rule. Harvesting in one account while automatic investments or dividend reinvestments in another account quietly create wash sales.
• Harvesting purely short-term losses when you’re mostly offsetting long-term gains. The character of gains and losses matters.
• Forgetting the calendar. Doing all your harvesting in late December and then accidentally repurchasing too soon in January.
• Not coordinating with a spouse. Trades in a spouse’s account may still be relevant when the IRS looks at your overall situation.

Year-round vs end-of-year harvesting

Many people only think about harvesting in December, but there are pros and cons:

End-of-year harvesting

• Pros: You know your actual gains for the year, so it’s easier to match losses.
• Cons: You may miss earlier opportunities; markets can move fast, and year-end trading can feel rushed.

Year-round harvesting

• Pros: You can be more intentional and less rushed, taking advantage of dips during the year.
• Cons: You need a system so you’re not constantly churning the portfolio or creating avoidable wash sales.

For many investors, a hybrid approach works well: set a handful of rules or thresholds with your advisor (for example, “look at harvesting if this fund is down more than X% from purchase”), and then do a final review near year-end.

Next steps: connect the dots with the wash sale rule

Tax-loss harvesting is powerful, but it doesn’t live in a vacuum. To really use it well, you need to understand how it fits together with:

• The wash sale rule and its 61-day window,
• Your mix of short-term and long-term gains and losses, and
• Your retirement and non-retirement accounts as a whole.

If you haven’t already, pair this article with:

• What Is the Wash Sale Rule? A Simple Guide for Everyday Investors
• Wash Sale Rule vs Tax-Loss Harvesting: How They Work Together (and Against You)
• How to Avoid Wash Sale Problems While Still Harvesting Losses

And if your portfolio or tax picture is more complex — multiple accounts, stock options, business interests, or large one-time gains — that’s when a short conversation with a tax professional can save you a lot of second-guessing later.