Takeaways
- Tax-loss harvesting means selling an investment at a loss to reduce capital gains.
- Taxpayers can deduct up to $3,000 (married filing jointly) from their taxable income.
- Tax-loss harvesting can be a multi-year strategy; losses can be used on future returns.
- Tax professionals and software use tax-loss harvesting to optimize your taxes.
- Taxpayers can use the proceeds from a net loss position to purchase another investment to remain in their overall portfolio.
What Is Tax-Loss Harvesting?
Tax-loss harvesting is a tax strategy that involves intentionally selling investments at a net loss to offset or reduce capital gains taxes. Anyone can use this strategy to lower their annual tax liability.
Selling poor-performing investments that have dropped in value, you can offset any capital gains from great-performing investments, reducing the amount you owe the Internal Revenue Service. Once you see your underperformers, you can redeploy the proceeds from the sale and reinvest your money in a similar asset, like another one of your favorite dividend-paying stocks.
A stock sale and repurchase strategy can let you keep your preferred position in the stock market while capturing a capital loss you can use to offset capital gains for that tax year.
Tax-loss harvesting is particularly useful for taxable investment accounts, like a traditional online stock brokerage account.
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How Tax-Loss Harvesting Works
Tax-loss harvesting begins with thoroughly examining your stock portfolio and identifying positions that have lost substantial value. You usually start doing this around the fourth quarter of each taxable year because you must sell positions by December 31 of that year.
From there, you identify losses that you want to “harvest” against investment gains. It is critical to note that tax loss harvesting only applies to taxable investment accounts. This strategy is not used for tax-advantaged accounts - like Traditional IRAs, 401(k) plans, or 457(b) plans – because these accounts are already tax-sheltered.
Once you pick positions to sell, you can make the trade and realize a capital loss. Tax-loss harvesting is helpful if you are in a high-income tax rate or bracket because the savings can turn a tax liability into a tax refund. (Read more about the 2024 and 2025 Federal Income Tax Rates and Brackets).
You can use capital losses to directly offset any capital gains you saw during the same tax period. And if your losses exceed your gains, you can also use a portion to offset taxable ordinary income.
Once you sell your initial positions and lock in your losses, you want to immediately reinvest the proceeds if you're going to maintain your market exposure, but make sure not to violate the wash-sale rule. The wash-sale rule, which we cover below, dictates how long you have to wait before reentering the same or a substantially similar position.
Whether you are a beginner investor or highly experienced, many tax filers work with financial advisors or tax professionals or use automated investment services that can easily track positions, extrapolate potential tax benefits, and automate reinvestments. (Read more about the Best Tax Filing Software Programs of 2025).
2025 Capital Gains Tax Rates
| Filing Status | 0% | 15% | 20% |
|---|---|---|---|
| Single | Up to $48,350 | $48,350 to $533,400 | Over $533,400 |
| Head of Household | Up to $64,750 | $64,750 to $566,700 | Over $566,700 |
| Married Filing Jointly | Up to $96,700 | $96,700 to $600,050 | Over $600,050 |
| Married Filing Seperately | Up to $48,350 | $48,350 to $300,000 | Over $300,000 |
Source: Internal Revenue Service Website [1]
Read More: 2024 and 2025 Capital Gains Taxes and Rules
Capital Loss Deduction
There is no need to worry if your stock portfolio is in the red. You can write off capital losses directly against your capital gains, and in some cases, you can use investment losses against your ordinary income. The actual amount that you can deduct from your ordinary income depends on factors like income level and tax filing status.
If your total capital losses exceed your capital gains, you can write off up to the below amounts against your ordinary income:
- $3,000 for Married Filing Jointly
- $1,500 for Married Filing Separately
Even if you exceed these limits, you can still carry them forward into future tax years to potentially offset future gains.[2] The carryforward amount reduces the taxes you owe if you sustain heavy losses in a single year, making it easy to use those losses in the future.
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Wash-Sale Rule
While there are no specific guidelines for tax-harvesting rules, there are rules that apply to investments, losses, and sales. One of the most essential guidelines is the wash-sale rule, which says you cannot claim a loss if you buy the same or “substantially identical stock or security” security within 30 days before or after selling the original investment.[3]
The point of the wash-sale rule is to prevent investors from taking a tax deduction while effectively retaining the same position. You want to keep meticulous records of all trades, including the original purchase price or cost basis and the eventual sale price, so you can accurately account for losses and gains when filing your taxes. You can find this information on your Form 1099s, issued by your online stock brokerage account.
Related: What Is Your Form W-2?
Where You Can Use Tax-Lost Harvesting
Tax-loss harvesting is a commonly used tax reduction strategy that can be applied to many different types of investments. Here are five investments it applies to:
1. You might find opportunities in individual stocks whose share prices dip below your original purchase price.
2. Exchange Traded Funds (ETFs) that track specific market segments can be sold at a loss and replaced with another ETF of a similar nature, provided you avoid a wash-sale rule violation.
3. Mutual funds are another option, particularly if their value declines due to overall market conditions.
4. Certain bonds, like corporate and municipal bonds, can have drastic swings in value at certain times of the year and become solid candidates for tax-loss harvesting.
5. In highly turbulent stock markets, some investors may even harvest tax losses from real estate investment trusts, or REITs, if those assets are held in a taxable account and meet any other requirements.
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Pros of Tax-Lost Harvesting
- You can reduce your taxable capital gains and reduce your tax liability.
- You might offset a portion of your ordinary income with losses that exceed your gains.
- You can maintain a similar investment position by reinvesting in like securities, limiting your exposure to the market’s fluctuations (subject to the wash-out rule).
- You may carry forward excess losses to future tax years, which can offer long-term tax savings opportunities.
Cons of Tax-Lost Harvesting
- You might alter your portfolio’s composition if you cannot find a comparable investment for your sold position without violating the wash-sale rule.
- If your brokerage account does not offer free trades, you may face additional costs, such as trading fees.
- You could complicate your record-keeping since you need to track multiple transactions and their associated cost bases.
- You might see minimal tax benefits if your capital losses do not exceed your gains or your income level places you in a lower tax bracket.
Related: Are You a HENRY? Check Now
Smart Summary
Tax-loss harvesting is the process of intentionally selling investments at a loss to reduce your total taxable income. You can write off up to $3,000 in net losses each tax year and carry forward unused losses. Consult with a tax professional or financial advisor for advice on optimizing your taxes and investment portfolio. (Read more about the 7 Steps to File Your Taxes.)
(1) Internal Revenue Service. Rev. Proc. 2024-40. Last Accessed February 18, 2025.
(2) Internal Revenue Service. Topic no. 409, Capital gains and losses. Last Accessed February 18, 2025.
(3) Internal Revenue Service. Publication 550 (2023), Investment Income and Expenses. Last Accessed February 18, 2025.
