Proactive Income Tax Strategies Series — Post 26.43
Nobody sets out to lose money on an investment. But holding a position that has tax-loss harvesting turns that loss into something with real, quantifiable value — provided the rule that trips up most investors is understood first.
How the Offset Actually Works
Capital losses offset capital gains dollar for dollar. Realized losses first offset gains of the same type — short-term losses against short-term gains, long-term against long-term — then any remaining net losses offset gains of the other type. If losses still exceed gains after that netting, up to $3,000 per year can offset ordinary income as well, such as wages or self-employment income, with a $1,500 limit for those married filing separately. Anything beyond that carries forward indefinitely to future tax years, retaining its original short-term or long-term character.
That $3,000 ordinary-income offset hasn’t changed since 1978 and isn’t indexed for inflation — worth keeping in mind so expectations stay realistic.
| Callout — Tax-Loss Harvesting: Key Numbers • Ordinary income offset: up to $3,000/year ($1,500 married filing separately) • Unused losses: carry forward indefinitely • Wash-sale window: 61 days total — 30 days before the sale, the sale date itself, and 30 days afterward • Disallowed wash-sale loss: added to the replacement shares’ cost basis — deferred, not permanently lost (except inside an IRA, where recovery isn’t possible) |
The Wash-Sale Rule: Where Most Investors Go Wrong
Here’s the scenario that catches investors off guard. An investor sells a losing position to realize the loss, planning to repurchase the same investment shortly after because conviction in it remains long-term. Buy back the same or a “substantially identical” security within 30 days before or after the sale — a 61-day window altogether — and the IRS disallows the loss for that tax year under the wash-sale rule.
The window doesn’t reset at year-end, either. Selling on December 20th and repurchasing on January 10th still triggers a wash sale, even though the two transactions fall in different tax years.
In a regular taxable account, the loss isn’t gone permanently — it gets added to the cost basis of the replacement shares, deferring the benefit rather than eliminating it. Inside an IRA, though, a wash sale triggered by a repurchase there cannot be recovered; no basis adjustment offers a remedy.
A Practical Workaround
The common approach is selling the losing position and immediately buying something similar but not “substantially identical” — a different fund tracking a comparable index, for instance — maintaining market exposure without triggering the wash-sale rule. Once 30 days have passed, moving back into the original position remains an option, if still desired.
Timing Matters Most as Year-End Approaches
Because the wash-sale window spans 30 days on either side of a sale, a harvesting decision made in mid-December still carries wash-sale exposure well into January. Anyone planning to harvest losses before year-end should build that window into the calendar rather than executing the trade on December 31st and assuming the calendar year draws a clean line.
Worth noting directly: recent tax legislation left all of this untouched. The wash-sale rule, the $3,000 offset limit, and the underlying capital gains rate structure remain unchanged under the One Big Beautiful Bill Act. If a decision to harvest losses was delayed pending clarity on whether the law affected this strategy, no such change occurred — this remains one of the more stable corners of the tax code.
One More Blind Spot Worth Naming
A broker’s 1099-B only tracks wash sales within that single account. A similar position held by a spouse in a different brokerage account, or inside a 401(k) with automatic purchases, can create a wash sale across accounts with nothing on either 1099-B flagging it. Tracking that exposure falls to the investor, not the broker.
| Checklist — Harvesting Losses Correctly Net gains and losses by type — short-term against short-term, long-term against long-term — before applying the ordinary-income offset. Plan the replacement position before selling, so market exposure isn’t lost during the 30-day window. Check across all accounts, including a spouse’s holdings and any accounts with automatic reinvestment, for wash-sale exposure a single 1099-B won’t catch. Never repurchase inside an IRA when trying to preserve a loss realized in a taxable account. Track carry-forward losses year to year — they don’t expire, but they’re easy to lose track of without a running log. |
Tax-loss harvesting won’t turn a bad investment into a good one. What it does is make sure a loss already absorbed in the market isn’t also a loss on the tax return.
| Weighing whether to harvest a position before year-end, or wondering about wash-sale exposure across accounts? Schedule a portfolio tax-loss review before the window closes. |
This concludes the current series on Proactive Income Tax Strategies. Next up in the series: charitable giving strategies that can double a deduction without changing how much actually gets given.