When should I harvest tax losses?
Last updated August 2026
Short answer
The mechanism is simple and the constraint is specific. Most of what goes wrong comes from either the calendar or the replacement security.
What a harvested loss does
It offsets capital gains first, short-term against short-term and long-term against long-term, then across categories.
Beyond that, up to $3,000 a year offsets ordinary income, which is the more valuable use because ordinary rates are higher.
Anything remaining carries forward indefinitely, so a large loss year continues to be useful for as long as it takes.
Why December is the wrong default
Losses appear when markets fall, and a decline in spring may be gone by December.
Reviewing positions after any meaningful drop captures losses that the calendar approach never sees.
The deadline for realising a loss is 31 December, but that is when it must be done by rather than when it should be done.
The wash sale window
Buying the same or a substantially identical security within 30 days before or after the sale disallows the loss.
The disallowed amount is added to the basis of the replacement shares, so it is deferred rather than destroyed, except in one case.
That case is a repurchase inside an IRA, where the loss is lost permanently with no basis adjustment to recover it.
Try it in Walnut
Walnut connects to your brokerage across accounts, which is the vantage point a single broker's records do not have when checking for wash sales.
Staying invested through it
Selling a broad US index fund and buying one tracking a different broad index maintains the exposure without holding the identical security.
Two funds tracking the same index are the case most likely to be treated as substantially identical, so choosing a genuinely different index is the safer route.
Waiting 31 days in cash is the alternative, and it introduces market risk that can easily exceed the tax saved.
When it is worth more
When your marginal rate is high, since the deduction is worth what your rate makes it worth.
When the loss offsets short-term gains, which are taxed as ordinary income.
When the replacement shares will eventually be donated or inherited, since the lower basis may never produce a taxable gain at all.
When to leave it alone
When the position is one you would not otherwise sell and no acceptable replacement exists.
When the loss is small enough that trading costs and effort outweigh it.
When you expect a much higher rate later, since harvesting lowers basis and increases the gain you will eventually realise at that higher rate.
Keeping the records straight
Set the cost basis method to specific identification so you can nominate the exact lots being sold, rather than letting the broker sell the oldest first.
Brokers report wash sales only within their own accounts, so cross-broker and IRA repurchases have to be tracked by you.
Keep a note of what was sold and what replaced it, because the 30-day window applies after the sale as well as before it.
Sources
The wash sale rule, capital loss limits and carry-forward rules are in IRS Publication 550, with rates and holding periods at Topic no. 409. Walnut is informational and is not an investment adviser. This guide is educational and not personalized tax advice.
FAQ
When should I harvest tax losses?
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Whenever a taxable position is meaningfully below its cost basis and you can maintain the exposure without triggering a wash sale. Waiting until December means missing losses that existed in March and recovered by autumn.
How much is a loss worth?
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Losses offset capital gains first, then up to $3,000 of ordinary income a year, with the remainder carried forward indefinitely. The value depends on your rate, and the carry-forward means nothing is wasted.
What is the wash sale rule?
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If you buy the same or a substantially identical security within 30 days before or after the sale, the loss is disallowed and added to the basis of the replacement shares. The window is 61 days in total around the sale.
Can I buy something similar instead?
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Replacing one broad index fund with another that tracks a different index is the standard approach and keeps you invested. Two funds tracking the identical index are the case most likely to be challenged, so a genuinely different index is safer.
Does the wash sale rule apply across accounts?
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Yes, including your IRA and your spouse's accounts. A repurchase inside an IRA is the worst version, because the disallowed loss is lost permanently rather than added to basis you will eventually use.
Is harvesting always worthwhile?
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It defers rather than eliminates tax, because selling lowers your cost basis and increases the eventual gain. It is most valuable when your current rate is high, when the loss offsets short-term gains, or when the shares will eventually be donated or inherited.
Does it work in a retirement account?
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No. Losses inside an IRA or 401(k) are invisible to the tax code, so there is nothing to harvest. This is entirely a taxable account activity.
What should I avoid?
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Selling something you actually wanted to keep purely for the deduction, and letting the tax tail wag the investment decision. The exposure should be maintained, otherwise you have made a market call to save a fraction of the loss in tax.