Tax-loss harvesting before December 31, 2026: how it works and the wash-sale trap

What is tax-loss harvesting?

Tax-loss harvesting means selling an investment in a taxable brokerage account for less than you paid, so the realized loss reduces your taxes. Losses first offset capital gains. If losses exceed gains, up to $3,000 ($1,500 if married filing separately) can reduce ordinary income each year, and the rest carries forward. For the 2026 tax year, the sale must settle as a trade made by December 31, 2026.

U.S. guidance reviewed October 30, 2026. Tax rules can change, and updates may take time to appear here. Confirm current details with IRS Publication 550 or a tax professional. The cover is an AI-generated conceptual illustration.

How the offset works

1. Short-term losses offset short-term gains; long-term losses offset long-term gains.
2. Any remaining net loss in one group offsets net gains in the other.
3. If you still have a net loss, deduct up to $3,000 against other income.
4. Carry any remainder forward to next year, keeping its short- or long-term character.

Worked example

Maria sold a fund earlier in 2026 for a $5,000 long-term gain. Another holding is down $8,000. In December she sells it.

| Step | Amount | | --- | --- | | Long-term gain | $5,000 | | Harvested loss | −$8,000 | | Net capital loss | −$3,000 | | Deducted against ordinary income in 2026 | −$3,000 | | Carried forward to 2027 | $0 |

If her long-term gain were taxed at 15% and her ordinary income at 22%, the move avoids about $750 on the gain and about $660 on income — roughly $1,410 in total. These rates are illustrative; your brackets and state taxes will differ.

The wash-sale rule

The IRS disallows a loss if you buy the same or a "substantially identical" security within 30 days before or after the sale — a 61-day window. Purchases in your IRA or your spouse's accounts can also trigger it, and so can automatic dividend reinvestment.

A disallowed loss is not gone forever: it is added to the cost basis of the new shares. But it will not help this year's taxes.

Ways people stay invested without a wash sale:

• Buy a fund that tracks a different index in the same asset class.
• Wait 31 days, then buy back the original.
• Turn off dividend reinvestment on the position for the window.

Whether two funds are "substantially identical" is not precisely defined; ask a tax professional if unsure.

When harvesting may not help

• You are in the 0% long-term capital gains bracket — offsetting gains saves nothing.
• The holding is in an IRA, 401(k) or HSA, where gains and losses are not taxed yearly.
• Trading costs or bid-ask spreads exceed the expected tax savings.
• You would sell something you do not actually want to replace.

Common mistakes

• Forgetting dividend reinvestment bought shares within 30 days.
• Buying back the same fund in an IRA right after selling it in a taxable account.
• Waiting until the last trading day, when markets may be closed or crowded.
• Not tracking carryforward losses from earlier years.

How MoneyPatrol can help

MoneyPatrol brings your accounts together so you can see investment balances alongside the rest of your finances and note year-end moves to discuss with your tax preparer. New accounts start free with Essential.

Sources

• IRS Publication 550: Investment Income and Expenses
• IRS Topic No. 409: Capital gains and losses
• Investor.gov: Capital gains and losses

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MoneyPatrol is not a financial, tax, investment, legal or accounting advisor. This article is for general educational purposes only and is not a substitute for personalised advice from a qualified professional. See our full disclaimer.