Personal Finance & Estate › Investing basics & strategy › Tax-efficient investing & asset location
Tax-loss harvesting & the wash-sale rule
· Tax rule
Standard practiceWhat most planners, CPAs and attorneys recommend.
Selling investments worth less than their cost to realize a tax-reducing loss, then staying invested in something similar.
See it on the Personal Finance & Estate map →How it works
Realized losses first offset capital gains; up to $3,000 of any excess offsets ordinary income each year, and the rest carries forward for life. The wash-sale rule disallows the loss if the same or a 'substantially identical' security is bought within 30 days before or after the sale, including in an IRA or a spouse's account; the loss is then added to the new shares' cost, or lost entirely if bought in an IRA. Investors often swap into a similar but different fund.
Why it matters for you
It turns market dips into tax assets that can shelter later gains, including gains from selling other investments.
Rules, limits and sources (2026)
IRC Secs. 1211 and 1212 set the $3,000 limit and carryforward; Sec. 1091 is the wash-sale rule; Rev. Rul. 2008-5 covers IRA repurchases.
Watch out for
Whether two funds tracking different but similar indexes are 'substantially identical' has never been clearly defined by the IRS.
Connections (3)
▸Tax-loss harvesting & the wash-sale rule is a tactic of Tax-efficient investing & asset locationStandard practice
How they connect
Tax-loss harvesting is one of the main tools of tax-efficient investing: it uses inevitable price dips in taxable accounts to bank losses that offset gains, while the portfolio stays invested in similar holdings.
When it applies
Long used by wealthy investors; automated since the 2010s by robo-advisors such as Wealthfront and Betterment and by direct-indexing accounts.
How sure?
IRC Secs. 1211, 1212 and 1091; robo-advisor and academic studies estimate the benefit, though estimates vary.
Watch out for
Studies disagree on how much it adds once the lower cost basis is eventually taxed; the payoff is largest if shares are held until death.
▸Tax-loss harvesting & the wash-sale rule offsets Capital gains tax (short- vs. long-term)Law or rule (2026)
How they connect
Harvested losses net against realized gains: short-term against short-term, long-term against long-term, then across. A net loss can offset up to $3,000 of other income a year, with the rest carried forward, so losses banked now can shelter a later large gain.
When it applies
Applies on every taxable investor's yearly Schedule D; California follows the same $3,000 limit and carryforward.
The rule
IRC Secs. 1211 and 1212; IRS Form 8949 and Schedule D; California Schedule D.
Watch out for
Unused carryforwards expire at death, so whether banked losses are ever fully used varies by family.
▸Tax-loss harvesting & the wash-sale rule works only in a Taxable brokerage account (individual, joint or trust)Law or rule (2026)
How they connect
Losses only count for tax in a taxable account. Inside IRAs, 401(k)s and Roths, gains and losses are not reported, so there is nothing to harvest; and repurchasing the sold fund in an IRA within 30 days permanently disallows the loss.
When it applies
Applies to individual, joint and trust brokerage accounts; brokers report sales and some wash sales on Form 1099-B.
The rule
IRC Sec. 1091; Rev. Rul. 2008-5 on IRA repurchases.
Watch out for
Brokers track wash sales only within one account, so investors with several accounts or advisors must track the rest themselves.