Selling an investment at a loss does not feel like a win. But it can lower your tax bill and that is worth something.
This move is called tax-loss harvesting. Here is how it actually works in 2026 and where the rules trip people up.
What Tax-Loss Harvesting Actually Is
Tax-loss harvesting means selling an investment that has lost value on purpose. You use the loss to offset a gain somewhere else or to lower your regular income. If you still want that type of investment, you can buy something similar right away.
This only works inside a regular, taxable brokerage account. It does not apply inside a 401(k) or an individual retirement account (IRA), because gains and losses inside those accounts are not taxed each year anyway.
The Wash Sale Rule Trips Up More People Than You Would Think
Here is the catch. You cannot sell an investment at a loss and then buy it right back. The Internal Revenue Service (IRS) calls this a wash sale and it blocks the loss.
The rule covers 30 days before the sale and 30 days after it, 61 days in total. If you buy a “substantially identical” investment in that window, the loss is disallowed. Normally, a blocked loss gets added to what you paid for the new shares, so you get the benefit later when you sell them.
Buying back the exact same stock or fund clearly counts. Past that, the line gets blurry. Two funds that follow the same index might count as “substantially identical,” so talk with a tax professional before you swap one for another.
Here is the part that surprises people: this rule follows you across accounts. If you sell a stock at a loss in your brokerage account and buy it back in your IRA, that still counts. Worse, when the repurchase happens inside an IRA, the loss is not just delayed. It is gone for good. The IRS will not let you use it later, even when you take money out of the IRA.
The $3,000 Ceiling and What Happens to the Rest
Once you have losses, here is what they can do. First, they cancel out any capital gains you have this year, with no limit. If you have $20,000 in gains and $20,000 in losses, your tax bill on that is zero.
After that, up to $3,000 a year can cancel out your regular income, like your salary. That number has not changed since 1978.
If your losses are bigger than that, the extra amount carries forward to future years for as long as you live. Losses still unused at death can only be used on your final tax return.
Know Your 2026 Bracket Before You Bother
Not everyone needs to harvest losses. It depends on your tax bracket for long-term gains.
In 2026, if your taxable income is $49,450 or less as a single filer or $98,900 or less married filing jointly, your long-term capital gains rate is already 0%. Long-term means you owned the investment for more than a year. Harvesting a loss to offset a gain you would not have paid tax on anyway does not help you.
Above $200,000 of income for a single filer or $250,000 for married couples filing jointly, an extra 3.8% Net Investment Income Tax can apply on top of the regular capital gains rate. That makes harvesting worth more the higher your income runs.
The Crypto Exception (For Now)
Cryptocurrency is not stock, at least not for this rule. The IRS treats it as property and the wash sale rule only covers stocks and securities.
That means you can sell a cryptocurrency at a loss and buy it right back the same day. There is no 30-day wait. The exception is a digital asset that is also a stock or security, sometimes called a tokenized security. Those generally still fall under the wash sale rule.
That gap may be closing. On September 16, 2026, the House Ways and Means Committee approved the Digital Asset Tax Certainty Act by a vote of 38 to 5. It would apply the wash sale rule to traded crypto, with an exception for certain U.S. dollar stablecoins. As written, it would cover sales made after September 14, 2026. The Joint Committee on Taxation, which estimates the cost of tax bills for Congress, projects the change would raise about $1.7 billion over ten years.
The bill is not law yet. It still needs a full House vote, Senate passage, and the President’s signature. But if it passes as written, a crypto loss you harvest this fall and buy right back could be disallowed. Talk with a tax professional before you count on this one.
Key takeaway: Tax-loss harvesting can offset your gains with no limit, plus up to $3,000 a year of your regular income, with anything left over carried forward. The wash sale rule blocks you from buying the same investment back within 30 days on either side. That rule also reaches your IRA, your Roth IRA, and purchases by your spouse. If you are converting money to a Roth IRA this year, that $3,000 can also help offset some of the income the conversion creates.
Before You Sell
December 31 is the deadline. For stocks and bonds traded on an exchange, the IRS goes by the trade date (the day you sell), not the later day the trade settles. Still, it helps not to wait until the last minute. You will want time to plan any buyback around the 30-day window. If you buy a mutual fund as your replacement, check whether it is about to pay a capital gain distribution. That payout counts as taxable income to you, even if you just bought the shares or reinvest it.
If you are also thinking about converting money to a Roth IRA this year, the two moves can work together. We cover that timing in “Roth Conversions in 2026: ‘Permanent’ Does Not Mean Forever.”
If you want help deciding which losses are worth harvesting and how that fits your bigger tax picture, a Trailhead Meeting is a good place to start.
This article is for informational purposes only and does not constitute personalized tax or investment advice. Consult a certified public accountant (CPA) or other qualified tax professional before acting on any strategy described here. Figures current as of September 2026 and subject to change.