When an investment in a taxable account falls below its purchase price, you can sell it to realize a capital loss. That loss offsets capital gains elsewhere in your portfolio — and if losses exceed gains, up to $3,000 per year can be deducted against ordinary income. Any remaining losses carry forward to future tax years indefinitely.
Identify a loss
Find a taxable account position trading below your cost basis — the price you originally paid.
Sell to realize the loss
Sell the position to lock in the capital loss. The loss is now available to offset gains.
Reinvest immediately
Reinvest proceeds in a similar — but not substantially identical — security to maintain market exposure.
✂️ Short-term vs. long-term matching
Short-term losses (assets held under 1 year) must first offset short-term gains, which are taxed at ordinary income rates. Long-term losses offset long-term gains, taxed at 0%, 15%, or 20%. The most valuable harvest is a short-term loss offsetting a short-term gain — saving at your highest ordinary income rate.
📋 The $3,000 ordinary income deduction
If your capital losses exceed your capital gains in a given year, up to $3,000 of the excess loss can be deducted against ordinary income — reducing your AGI. This modest but real benefit compounds over time if you harvest consistently in down years and carry forward unused losses.
♾ Carrying losses forward
Unused losses above the $3,000 annual cap carry forward to future tax years with no expiration. A large harvest in a down market year can generate a loss carryforward that offsets future gains for years — or even decades — providing a lasting tax shield on your taxable account.
⚠️ The wash-sale rule — the critical constraint
You cannot repurchase the same or a "substantially identical" security within 30 days before or after the sale — or the IRS disallows the loss. This applies to the same stock, the same mutual fund, or an ETF that tracks an identical index. The solution: replace with a similar but non-identical security. For example, sell an S&P 500 ETF and immediately repurchase a total stock market ETF — maintaining exposure without triggering the wash-sale rule.
🚫 Low-bracket years — harvest gains instead
In years where your taxable income falls in the 10% or 12% bracket, long-term capital gains are taxed at 0%. In these years, consider harvesting gains — not losses. Selling appreciated positions at 0% and immediately repurchasing steps up your cost basis permanently, reducing future taxable gains.
🚫 Assets with step-up in basis at death
Taxable account assets receive a step-up in cost basis at the owner's death — meaning heirs inherit at fair market value with no capital gains tax on prior appreciation. If you plan to hold an appreciated asset until death and pass it to heirs, harvesting losses to offset gains on that asset may be unnecessary.
Best practice: harvest continuously, not just in December
Most investors only think about tax-loss harvesting in December. The most effective approach is year-round monitoring — harvesting losses whenever they arise, regardless of season. Waiting until year-end means missing opportunities that appeared and disappeared earlier in the year.