Seeing an investment decline in value is rarely enjoyable.
But in a taxable investment account, an investment loss may sometimes create a tax-planning opportunity.
That strategy is called tax-loss harvesting.
Tax-loss harvesting generally involves selling an investment that has declined in value and using the realized loss to help offset taxable investment gains elsewhere in your portfolio.
Done thoughtfully, it can potentially reduce your current tax bill while allowing you to reposition your portfolio at the same time.
But there are important rules to understand, and selling an investment simply because it has gone down is not always a good decision.
Here is what investors should know.
What Is Tax-Loss Harvesting?
Imagine you bought an investment for $50,000 and it is now worth $40,000.
As long as you continue to own the investment, that $10,000 decline is generally considered an unrealized loss.
For tax purposes, the loss generally becomes relevant when you actually sell the investment.
If you sell it for $40,000, you may realize a $10,000 capital loss.
That loss can potentially be used to offset capital gains you realized elsewhere in your taxable portfolio.
For example:
Investment A generated a $15,000 capital gain
Investment B generated a $10,000 capital loss
The $10,000 loss may help offset part of the $15,000 gain, leaving you with a $5,000 net capital gain before considering other transactions.
That is the basic idea behind tax-loss harvesting.
Why Would I Sell an Investment at a Loss?
At first glance, selling something after it falls in value may seem like admitting defeat.
But tax-loss harvesting is not necessarily about abandoning your investment strategy.
Instead, it can be a way to recognize a loss for tax purposes while also reviewing whether your portfolio should be adjusted.
You might consider harvesting a loss if:
An investment no longer fits your strategy
You want to rebalance your portfolio
You have significant realized capital gains
You want to replace an investment with another that provides similar exposure
Your tax situation makes realizing the loss particularly valuable
The tax benefit should generally be one part of the decision—not the entire reason for it.
How Do Capital Losses Offset Capital Gains?
Capital gains and losses are generally categorized as either short-term or long-term.
An investment held for one year or less generally produces a short-term gain or loss.
An investment held for more than one year generally produces a long-term gain or loss.
Short-term capital gains are generally taxed as ordinary income, while long-term capital gains may qualify for preferential tax rates depending on your income and circumstances.
The tax rules generally net capital gains and losses together when determining the amount ultimately reported on your tax return.
That means harvesting losses can sometimes be especially useful in a year when you have realized meaningful gains.
What If My Losses Are Larger Than My Gains?
Tax-loss harvesting can still potentially provide a benefit even if your capital losses exceed your capital gains.
If your net capital losses are greater than your net capital gains, individuals can generally use up to $3,000 of net capital losses per year to reduce other taxable income.
For married taxpayers filing separately, the limit is generally $1,500.
For example, suppose you have:
$10,000 of realized capital gains
$18,000 of realized capital losses
After offsetting the gains, you would have an $8,000 net capital loss.
You may generally be able to use up to $3,000 of that amount against other income for the year.
The remaining unused loss may potentially be carried forward into future tax years.
Can Capital Losses Carry Forward?
Yes.
If your net capital loss exceeds the amount you are allowed to deduct in the current year, the unused portion can generally be carried forward into future years until it is used.
That can make tax-loss harvesting valuable even if you do not have significant capital gains this year.
For example, if you end the year with a $20,000 net capital loss and use $3,000 against other income, much of the remaining loss may be available to offset gains or income in future years, subject to applicable tax rules.
Those loss carryforwards can sometimes become a valuable tax asset over time.
Watch Out for the Wash-Sale Rule
One of the most important rules to understand when tax-loss harvesting is the wash-sale rule.
In general, you cannot simply sell an investment at a loss, claim the tax benefit, and immediately buy back substantially the same investment.
A wash sale generally occurs when you sell stock or securities at a loss and acquire substantially identical securities within the period beginning 30 days before the sale and ending 30 days after the sale.
That creates a 61-day window surrounding the sale that investors need to consider.
If the wash-sale rule applies, the loss may be disallowed for current tax purposes.
What Does “Substantially Identical” Mean?
This is where tax-loss harvesting can become more complicated.
If you sell shares of one company and immediately repurchase shares of that exact same company, the situation is relatively straightforward.
But investors sometimes want to remain invested in the market while harvesting a loss.
That can lead to strategies such as selling one investment and buying a different investment that provides similar market exposure.
Whether two securities are considered substantially identical depends on the facts and circumstances.
There is not necessarily a simple rule that says two funds are always different enough simply because they have different ticker symbols.
That is one reason tax-loss harvesting should be coordinated carefully.
The Wash-Sale Rule Can Affect More Than One Account
Another important consideration is that the wash-sale rule is not necessarily limited to the brokerage account where the loss occurred.
IRS guidance indicates that wash-sale treatment can also apply when substantially identical securities are acquired in an IRA or Roth IRA during the applicable window.
It may also become relevant if a spouse purchases substantially identical securities.
This can create problems for investors who have:
Multiple brokerage accounts
Automatically reinvested dividends
Retirement accounts
Employee stock purchase plans
Accounts managed by different financial institutions
For example, you might intentionally sell an investment in one account but unknowingly repurchase shares through automatic dividend reinvestment somewhere else.
That is why coordinating your accounts can be important when implementing a tax-loss harvesting strategy.
What About Automatic Dividend Reinvestment?
Automatic dividend reinvestment is easy to overlook.
Suppose you sell an investment at a loss near the end of the year.
A few days later, a dividend from the same investment is automatically reinvested and purchases additional shares.
That purchase could potentially complicate your tax-loss harvesting strategy.
Before harvesting losses, it can be helpful to review whether dividend reinvestment is turned on for any investments you are considering selling.
Tax-Loss Harvesting Usually Applies to Taxable Accounts
Tax-loss harvesting is primarily a strategy for taxable investment accounts.
Selling an investment for a loss inside a traditional IRA, Roth IRA, 401(k), or similar tax-advantaged retirement account generally does not create a deductible capital loss on your personal tax return.
That is because investment gains and losses inside those accounts are typically treated differently for tax purposes.
So when evaluating tax-loss harvesting opportunities, the focus is generally on your taxable brokerage accounts.
When Does Tax-Loss Harvesting Make the Most Sense?
There are several situations where the strategy may be worth reviewing.
You Have Realized Significant Capital Gains
Perhaps you sold a stock, mutual fund, business interest, or other investment earlier in the year and generated a large taxable gain.
Harvesting losses elsewhere in your portfolio may help offset part of that gain.
You Are Already Planning to Sell an Investment
If an investment no longer fits your financial plan, realizing a tax loss may simply provide an additional benefit to a decision you were already considering.
You Are Rebalancing Your Portfolio
Over time, market movements can cause your portfolio to drift away from its intended allocation.
Tax-loss harvesting can sometimes be incorporated into the rebalancing process.
Markets Have Experienced a Decline
Periods of market volatility can create temporary losses even in investments you may ultimately want to remain exposed to.
Those periods can create opportunities to evaluate whether harvesting losses fits into your broader portfolio strategy.
You Expect Higher Capital Gains in the Future
Loss carryforwards may potentially help offset future realized gains.
That can make harvesting a loss worth considering even if you do not have enough gains to use the entire loss this year.
When Might Tax-Loss Harvesting Not Make Sense?
Tax-loss harvesting is not automatically beneficial just because an investment is down.
It may not make sense if:
You expect the investment to recover quickly and do not have an appropriate replacement
Selling would significantly change your investment strategy
Transaction costs or other consequences outweigh the potential tax benefit
You are likely to trigger the wash-sale rule
Your tax rate is already relatively low
The tax savings would be minimal
You are selling solely for tax reasons rather than investment reasons
It is also important to remember that tax-loss harvesting may defer taxes rather than permanently eliminate them.
If you replace an investment and the replacement appreciates, you may eventually realize a taxable gain when that investment is sold.
The strategy can still be useful, but it should be viewed within the context of your long-term plan.
Tax Savings Should Not Drive Your Entire Investment Strategy
Suppose an investment is down 20%, but you still believe it belongs in your portfolio.
Selling it solely because you want a tax deduction could potentially cause you to miss a recovery or alter your investment exposure.
On the other hand, suppose an investment has declined and no longer fits your long-term strategy.
In that case, realizing the loss may allow you to improve the portfolio while also receiving a potential tax benefit.
That is a much stronger reason to consider the strategy.
The question should not simply be:
“Can I get a tax deduction if I sell this?”
A better question is:
“Does selling this investment improve my portfolio, and is there also a tax opportunity?”
Don't Wait Until the Final Trading Day of the Year
Tax-loss harvesting often receives more attention in November and December.
But waiting until the final days of the year can create unnecessary pressure.
Before implementing a strategy, you may need time to:
Review year-to-date realized gains and losses
Identify investments with unrealized losses
Review loss carryforwards from prior years
Consider the wash-sale rule
Decide what investment may replace the position
Coordinate transactions across multiple accounts
Speak with your financial advisor or tax professional
Markets can also move quickly.
An investment showing a significant loss today may not show the same loss several weeks from now.
Tax planning is generally easier when it begins before December 31 is right around the corner.
Tax-Loss Harvesting Is Both a Tax Decision and an Investment Decision
Tax-loss harvesting sits at the intersection of investment management and tax planning.
The tax return tells you how gains and losses are ultimately reported.
But the portfolio determines which investments should actually be bought, sold, or replaced.
Ideally, those decisions should be coordinated.
At Generations Tax & Wealth Management, we help clients look at investments and taxes together rather than treating them as completely separate parts of their financial lives.
If you have realized investment gains in 2026 or are wondering whether losses in your portfolio could create a year-end tax-planning opportunity, schedule a conversation with our team before the end of the year.
This material is intended for general educational purposes only and should not be considered individualized tax, legal, or investment advice. Tax-loss harvesting involves tax and investment considerations that vary based on individual circumstances. Consult with qualified tax and financial professionals before implementing a strategy.