Tax-Loss Harvesting Before Year-End: Rules, Wash Sales and a Checklist

Capital at risk. Selling and re-buying investments can leave you out of the market at the wrong moment, and tax rules differ by country. This article describes US federal rules as published by the IRS as of October 2026. It is general information, not personalised tax advice.

The short answer: tax-loss harvesting means selling an investment in a taxable account that is worth less than you paid, so the realised loss can offset capital gains — and up to $3,000 a year of ordinary income ($1,500 if married filing separately), with any excess carried forward. The trap is the wash sale rule: if you, your spouse or your IRA buy substantially identical shares within 30 days before or after the sale, the loss is disallowed for now. For US taxpayers, a sale counts in 2026 if its trade date is on or before 31 December 2026.

It is the most searched tax topic of the investing year's last quarter for a reason: it is one of the few tax decisions an ordinary investor makes entirely on their own, and it has a hard deadline. Done carefully, it turns an unwelcome paper loss into a tax asset. Done carelessly, it produces a disallowed loss, a confusing basis adjustment and a portfolio you no longer recognise.

How harvesting a loss actually saves tax

The IRS splits gains and losses by holding period. If you held an asset for more than one year it is long-term; one year or less, short-term, and short-term gains are taxed as ordinary income. A harvested loss is first netted against gains of the same kind, and any remainder against the other kind.

If your losses for the year exceed your gains, IRS Topic 409 says you can deduct the lesser of $3,000 ($1,500 if married filing separately) or your total net loss from Schedule D, line 16. Anything beyond that carries over to the next year and is treated as if incurred then. Publication 550 contains the worksheet for working out the carryover.

The value of a harvested loss therefore depends on what it offsets. A loss that cancels a short-term gain taxed at your ordinary rate saves more than one that cancels a long-term gain. For taxable years beginning in 2025, Topic 409 lists the 0% long-term rate as applying to taxable income up to $48,350 for single filers and $96,700 for married couples filing jointly; the 15% rate runs up to $533,400 and $600,050 respectively, with 20% above that. Check the page for the thresholds that apply to the year you are filing.

The wash sale rule, in the IRS's own terms

Publication 550 says a wash sale happens when you sell or trade stock or securities at a loss and, within 30 days before or after the sale, you buy substantially identical stock or securities, acquire them in a fully taxable trade, acquire a contract or option to buy them, or acquire substantially identical stock for your IRA or Roth IRA. If you sell and your spouse or a corporation you control buys substantially identical stock, that is a wash sale too.

That window is 61 days in total, and it looks backwards as well as forwards. Buying more of a fund in early December, then selling the older, higher-cost lot at a loss in late December, can catch you just as surely as buying back in January. Automatic dividend reinvestment buys shares too, so a reinvested dividend in the same fund during the window is a purchase to watch for.

The consequence is a deferral, not a permanent loss — with one big exception. Normally the disallowed loss is added to the cost of the new shares, and your holding period for the new shares includes the time you held the old ones. Publication 550's example: you buy 100 shares for $1,000, sell them for $750 and buy them back within 30 days for $800. The $250 loss is disallowed, and your basis in the new shares becomes $1,050. But the IRS excludes the IRA case from that adjustment, so a loss washed by a purchase inside your IRA or Roth IRA does not get added to any basis you can use later.

What "substantially identical" means in practice

The IRS does not publish a list. Publication 550 says you must consider all the facts and circumstances, and that shares of one corporation are ordinarily not substantially identical to shares of another. Selling one company's shares and buying a competitor's is clearly outside the rule. Selling one fund and buying another fund that tracks the same index from a different provider is the grey area investors argue about, and the IRS has not drawn a bright line through it.

A cautious approach is to swap into a fund that does something genuinely different — a different index, a broader or narrower market, a different weighting method — rather than a near-clone. If you would rather not take that view at all, waiting 31 days in cash is the rule-proof alternative, at the cost of being out of the market for a month. Our guide to who picks the index explains why two "similar" index funds can hold different things.

A year-end checklist

When harvesting is not worth it

When the loss is tiny. Trading costs, spreads and the risk of being out of the market can exceed a small tax saving. The arithmetic of costs is covered in fund costs: TER, tracking difference and spread.

When the replacement changes your portfolio. A swap that alters your asset mix is a portfolio decision dressed up as a tax decision. If the result no longer matches your plan, you have a rebalancing job: see rebalancing your portfolio.

When you are in a low bracket. If your long-term gains would fall in the 0% band anyway, harvesting a loss now may waste it; the loss would be worth more in a later year with higher income.

When you live outside the US. Other countries run different rules, and nothing in this article applies outside US federal tax. Norwegian investors using an ASK face a different system entirely — see investing from Norway: ASK, IPS and fund tax. For the wider picture of which holdings belong in which account, read tax-efficient investing.

This is general information about US federal tax rules. It does not cover state tax, and it is not a substitute for advice from a tax professional who knows your situation.

Frequently asked questions

What is the deadline for tax-loss harvesting in 2026?

For US federal tax, the sale's trade date must be on or before 31 December 2026 for the loss to count in 2026. Publication 550 says the trade date, not the settlement date, determines the year for securities traded on an established market.

How much can tax-loss harvesting deduct?

Losses offset capital gains without limit. Beyond that, you can deduct up to $3,000 of net capital loss against other income ($1,500 if married filing separately) and carry the rest forward to later years.

Does the wash sale rule apply to my IRA?

Yes. Buying substantially identical stock in your IRA or Roth IRA within 30 days of selling it at a loss in a taxable account is a wash sale under Publication 550, and in that case the disallowed loss is not added to the basis of the new shares.

Can I sell a fund and buy a similar one straight away?

You can buy a different security immediately. Whether a very similar fund counts as "substantially identical" depends on the facts and circumstances, and the IRS has not published a list, so many investors choose a replacement that tracks a different index.

Does tax-loss harvesting work in a 401(k) or IRA?

No. Gains and losses inside tax-advantaged accounts are not reported as capital gains or losses each year, so there is nothing to harvest there.

Sources

More on keeping tax down: asset location — which account holds what · foreign dividend withholding tax.

This article was written by Thomas Lovas Lokoy — researched and drafted with AI assistance from published sources; edited and published by NorwegianSpark SA. YieldNav is operated by NorwegianSpark SA (org. 834 984 172), founded by Thomas Lovas Lokoy. We are not licensed financial advisers, and nothing here is personalised advice. Some links are affiliate links; where a partner pays us, your capital is still at risk and our editorial view is unchanged. Read our about page, editorial policy and affiliate disclosure.