What is the wash sale rule?

You cannot buy a "substantially identical" investment within 30 days before or after selling at a loss. If you do, the loss is disallowed. Solution: buy a similar but not identical fund (e.g., sell a total US market fund, buy an S&P 500 fund).

Can I tax-loss harvest in my 401(k) or IRA?

No. Tax-loss harvesting only works in taxable brokerage accounts. Retirement accounts are already tax-advantaged, so there's no capital gain to offset.

Is there a limit to how much I can harvest?

You can harvest unlimited losses to offset capital gains dollar-for-dollar. Beyond that, you can deduct up to $3,000 per year against ordinary income. Remaining losses carry forward to future years indefinitely.

When can you tax-loss harvest?

Anytime investments are down from your purchase price. Many people do it in December before year-end, but market dips throughout the year create opportunities. Some services do it automatically and daily.

Does tax-loss harvesting actually save money or just defer taxes?

Both. The $3,000 annual deduction against ordinary income is a real savings. Offsetting gains is technically a deferral, but if you hold until death, your heirs get a stepped-up basis - meaning the deferred tax may never be paid.

Tax Optimization

Tax-Loss Harvesting

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intermediate · $100K - $250K

When investments drop in value, sell them to "harvest" the loss.

Losses offset capital gains dollar-for-dollar.

Extra losses offset up to $3,000 of ordinary income annually.

Remaining losses carry forward forever.

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Key takeaways

Selling an investment that has dropped realizes a capital loss you can use to offset capital gains dollar-for-dollar.
Losses beyond your gains can offset up to $3,000 of ordinary income per year, and any remainder carries forward indefinitely.
The wash-sale rule disallows the loss if you buy a substantially identical investment within 30 days before or after the sale.
It only applies in taxable brokerage accounts, not in IRAs or 401(k)s.

How Holding Individual Securities Affects Tax-Loss Harvesting

One difference between holding individual securities and holding a broad index fund like the S&P 500 is how losses can be realized for tax purposes.

With an index fund, if $10,000 grows to $20,000, any sale triggers capital gains taxes on the entire appreciation - regardless of how many underlying companies declined or outperformed. Losses inside the fund cannot be selectively realized.

Holding individual securities, by contrast, allows tax-loss harvesting on specific positions. An investor may reach the same $20,000 total portfolio value but selectively sell underperforming positions to realize capital losses (up to $3,000 annually against ordinary income), generate liquidity, and continue holding appreciated securities. The tradeoff is added complexity and cost: managing many individual positions takes more effort than holding a single fund.

Requirements

Taxable brokerage account (not retirement accounts)
Investments with unrealized losses

How to Implement

1Identify investments down from purchase price
2Sell losing investments before year-end
3Buy similar (not identical) investment to maintain exposure
4Wait 31 days before repurchasing identical investment (wash sale rule)
5Report losses on tax return

The bottom line
Tax-loss harvesting turns a paper loss into a tax offset while keeping you invested through a similar (not identical) holding. The wash-sale rule and the taxable-account requirement are the details that make or break it.

Frequently Asked Questions

Educational Only: This information is for educational purposes. Consult a qualified financial advisor or tax professional before implementing.

Last reviewed: April 2026

Related tax optimization strategies

HSA Triple Tax AdvantageThe only account with tax-free contributions, growth, AND withdrawals for medical expenses.Direct IndexingOwn individual stocks instead of index funds to harvest $20K-50K+ in tax losses annually.Securities-Based LendingBorrow against your portfolio instead of selling, avoiding capital gains taxes.

Sources

Internal Revenue Service, Rev. Proc. 2025-32
2026 inflation-adjusted amounts (tax brackets, standard deduction, estate & gift, FSA, credits)
Internal Revenue Service, Notice 2025-67
2026 retirement plan limits (401(k), IRA, SIMPLE, catch-up)
Internal Revenue Service, Rev. Proc. 2025-19
2026 HSA and HDHP inflation-adjusted limits

Educational information only. Not financial, tax, or legal advice or a recommendation. Figures are drawn from the primary sources cited above; verify current amounts with the source before acting.