Master Tax Loss
Harvesting
Everything you need to know — from the basics to advanced crypto-specific approaches, key rules, and a complete glossary.
Key Figures for Harvesting
The recurring tax data that tax-loss harvesting runs on. Dollar thresholds are reviewed by the IRS each year; figures marked "indexed" change annually — re-check them each season.
Ordinary-Income Loss Offset
$3,000
$1,500 if married filing separately
Fixed by statute — not inflation-indexed
2027/28: unchanged (fixed by statute)
NIIT Surcharge
3.8%
MAGI > $200k single · $250k MFJ
Thresholds fixed by statute
2027/28: thresholds unchanged (fixed by statute)
Medicare IRMAA Cliff
≈$218,000
Married couples, 2026
Indexed annually · not gradual
2027/28: indexed — projected to rise (see projection)
Long-Term Capital Gains
0 / 15 / 20%
Rate tiers on long-term gains
Breakpoints indexed annually
2027/28: rate tiers stable; income breakpoints rise
Federal Ordinary Brackets
10 → 37%
Seven ordinary income brackets
Indexed annually
2027/28: rates stable; bracket widths rise
Wash Sale Window
61 days
30 before + sale + 30 after
Fixed by statute
2027/28: unchanged (fixed by statute)
Future-Year Projection (Indexed Figures)
Indexed thresholds rise with inflation each year. Project the IRMAA cliff forward from the 2026 base of ≈$218,000 (married) at your assumed inflation rate. The same mechanics lift LTCG income breakpoints and ordinary-bracket widths; their rate tiers stay constant.
$223,400
≈$218,000 × 1.025 (2.5%/yr over 1 yr)
Figures shown are for the 2026 tax year. The $3,000 loss offset and NIIT thresholds are set by statute and do not adjust for inflation. IRMAA, LTCG breakpoints, and ordinary brackets are indexed and reset each year. Projections are estimates off the 2026 base — the IRS announces official amounts each fall. Provided for informational purposes — consult a qualified CPA.
How Tax Loss Harvesting Works
01
You Buy an Investment
You purchase shares of a stock, ETF, or cryptocurrency. Your cost basis is the price you paid, including any commissions or fees.
02
The Value Drops
The market declines and your investment is now worth less than you paid. You have an unrealized loss — it only becomes deductible when you sell.
03
You Sell to Realize the Loss
You sell the position, converting the unrealized loss into a realized capital loss. This loss can now be used on your tax return.
04
Offset Gains & Income
The realized loss offsets capital gains dollar-for-dollar. If losses exceed gains, up to $3,000 can reduce ordinary income. Excess carries forward.
05
Reinvest in Similar Assets
To maintain market exposure, you immediately reinvest in a similar (but not substantially identical) asset. For stocks, this means a comparable ETF or competitor.
Worked Example: The $10,000 Scenario
Key Insight
You still hold market exposure (via a similar ETF), but you've reduced your tax bill by $1,200 — real money back in your pocket.
The Financial Potential of Tax Loss Harvesting
The $3,000 annual deduction is only the surface. For a retiree with a $1.8M taxable account, systematic harvesting can generate over $150,000 in permanent, tax-free wealth over a retirement — because losses stack three benefits, and the third is rarely discussed.
Offset Capital Gains
Harvested losses offset realized capital gains dollar-for-dollar with no cap. Gains from rebalancing or selling to fund retirement are neutralized at your long-term capital-gains rate (e.g. 15%).
$3,000 Income Deduction
Losses left after offsetting gains deduct up to $3,000 ($1,500 if MFS) of ordinary income each year at your marginal rate — the piece most taxpayers stop at.
The 'Tax Eraser' (IRC §1014)
Harvesting lowers your cost basis, building deferred gains. At death, the step-up in basis resets that basis to market value — forgiving the deferred tax and making the savings permanent. Often the largest of the three.
Worked Example: Thomas & Karen, 25-Year Retirement
In 2026, a retired couple with $1.8M in a taxable brokerage, 22% federal bracket, 15% long-term capital-gains rate. They harvest $20,000 in losses annually for 25 years — $500,000 total.
Annual loss offsetting gains
$17,000
× 15% LTCG = $2,550
Annual income deduction
$3,000
× 22% ordinary = $660
Annual tax savings
$3,210
$80,250 over 25 yrs
Reinvested at 5% / yr
$153,000+
Compounded wealth
The Tax Eraser
Those 25 years of harvesting lowered the couple's cost basis by $500,000. Under IRC §1014, the step-up in basis at death forgives the deferred tax on that $500,000 of embedded gains — turning the $153,000 of compounded savings into permanent, tax-free wealth.
Medicare IRMAA Surcharges
Realized capital gains raise MAGI. In 2026, a married couple's MAGI above about $218,000 can trigger IRMAA — and the surcharge is not gradual: exceeding the threshold by even one dollar can add $2,000+ per year. By offsetting gains, harvesting keeps those gains off the return and helps avoid the cliff.
Surviving Spouse Caveat
The step-up applies to assets the deceased owned. In most states, a joint account gets only a half step-up at the first spouse's death — the surviving spouse keeps their original basis on the other half. This creates an estate-planning puzzle that should be modeled alongside the harvesting plan.
Implementing It — For $1.5M+ Taxable Accounts
Review individual tax lots, not average cost basis — harvest the highest-cost lots first.
Audit dividend-reinvestment across all accounts, especially IRAs, to avoid wash sales.
Run a systematic, year-round plan — not reactive year-end selling.
Pre-plan replacements (e.g. S&P 500 → total market or a different provider's large-cap fund).
Coordinate investment trades with tax filings — carryforwards, basis tracking, and step-up.
Verify with a CPA or advisor; include accounts held outside professional management.
EDUCATIONAL ESTIMATION TOOL — NOT TAX ADVICE. Figures assume losses offset gains first, then $3,000 of ordinary income, with the remainder carried forward. Step-up per IRC §1014. Consult a qualified CPA.
Crypto vs. Stocks
The rules differ significantly — and crypto investors have a major advantage when it comes to tax loss harvesting.
* As of 2026, the wash sale rule does not apply to cryptocurrency under current law. Proposed legislation may change this. Tax rules vary by jurisdiction — consult a qualified tax accountant, CPA, or tax attorney.
Stock Investor Approach
The Challenge: The wash sale rule forces you to wait 31 days before repurchasing the same stock.
The Solution: Sell the losing stock and immediately buy a similar ETF or a direct competitor.
Safe Swap Examples
- VOO → IVV
- QQQ → QQQM
- AAPL → XLK
Crypto Investor Approach
The Advantage: No wash sale rule means you can sell Bitcoin at a loss and buy it back immediately.
The Approach: During any significant dip, sell your position to realize the loss, then repurchase immediately.
Watch Out For
- Crypto-to-crypto swaps are taxable events
- Track every transaction — exchanges may not
- Proposed legislation may add wash sale rules
Key Rules to Know
Wash Sale Rule (Stocks)
Buying a substantially identical security within 30 days before or after a sale disallows the loss. The 61-day window (30 days before + sale day + 30 days after) must be clear.
No Wash Sale for Crypto
Currently, the IRS wash sale rule applies only to "securities." Cryptocurrency is classified as property, not a security — so the rule does not apply. This may change with new legislation.
$3,000 Ordinary Income Limit (2026)
Net capital losses exceeding capital gains can offset up to $3,000 of ordinary income per year ($1,500 if married filing separately) — a fixed statutory amount, not inflation-indexed. Excess carries forward indefinitely.
Loss Netting Order
Short-term losses first offset short-term gains; long-term losses first offset long-term gains. Remaining losses of either type can then offset the other. The IRS dictates this order.
NIIT Surcharge (2026)
High earners (MAGI > $200k single / $250k MFJ) pay an additional 3.8% Net Investment Income Tax. These thresholds are fixed by statute, not indexed. Harvesting losses reduces net investment income, potentially eliminating this surcharge.
Carryforward Has No Expiration
Unused capital losses carry forward to future years indefinitely. They appear on Schedule D and automatically apply to future gains — a permanent tax asset on your return.
Step-Up in Basis (IRC §1014)
At death, the cost basis of assets in a taxable account resets to current market value. This forgives the deferred gains created by years of harvesting — the 'tax eraser' that makes savings permanent.
Surviving Spouse — Half Step-Up
In most states, a jointly held account receives only a half step-up at the first spouse's death. The surviving spouse keeps their original basis on the remaining half — an estate-planning consideration.
IRA / 401(k) Wash Sales
An automatic dividend reinvestment in an IRA or 401(k) that buys a substantially identical security within the 61-day window of a taxable sale can permanently disallow the loss — even across account types.
Spousal Wash Sales
For married couples filing jointly, the wash sale rule applies across both spouses' accounts. A loss is disallowed if one spouse sells and the other buys the same security within the 61-day window.
Medicare IRMAA
Realized capital gains raise MAGI. Exceeding the IRMAA threshold ($218,000 for couples in 2026) by even one dollar can trigger $2,000+ in annual surcharges. Harvesting offsets gains to keep MAGI below the cliff.
Glossary
Key terms every tax-savvy investor should know.
Frequently Asked Questions
Harvested losses first offset capital gains dollar-for-dollar with no limit. If losses exceed gains, up to $3,000 ($1,500 if married filing separately) can offset ordinary income each year — a fixed statutory amount that has not changed for 2026. Any remaining losses carry forward indefinitely to future tax years.
Yes — and crypto has a major advantage. Currently, the wash sale rule does not apply to cryptocurrency (classified as property, not securities). You can sell Bitcoin at a loss and repurchase it immediately, preserving the loss deduction without losing market exposure.
The IRS disallows a loss deduction if you buy a "substantially identical" security within 30 days before or after the sale. This creates a 61-day window. If triggered, the disallowed loss is added to your new shares' cost basis — it's deferred, not permanently lost.
Year-end (November–December) is the most common time to capture losses before the tax year closes. However, opportunistic harvesting during market dips and systematic monthly reviews can capture losses that might otherwise recover before year-end.
No. Tax-loss harvesting only applies to taxable investment accounts. Losses in tax-advantaged accounts (401k, IRA, Roth IRA) cannot be deducted since gains in those accounts are already tax-deferred or tax-free.
When your total capital losses exceed your capital gains plus the $3,000 ordinary income limit, the excess carries forward to future tax years indefinitely. It appears on Schedule D and automatically offsets future gains — a permanent tax asset.
Yes. Short-term holdings (≤1 year) are taxed at ordinary income rates (up to 37%). Long-term holdings (>1 year) qualify for preferential rates (0%, 15%, or 20%). The holding period of the replacement security resets when you harvest.
An additional 3.8% tax on investment income for high earners (MAGI > $200k single / $250k MFJ) — thresholds fixed by statute for 2026, not inflation-indexed. Harvesting losses reduces your net investment income, which can reduce or eliminate the NIIT surcharge — a double benefit for high-income investors.
The $3,000 ordinary-income deduction is only one of three stacked benefits. Losses first offset capital gains dollar-for-dollar with no cap, then up to $3,000 of income, then carry forward. Reinvesting the annual tax savings compounds them — a couple harvesting $20,000/yr for 25 years at 5% builds over $153,000 in wealth.
When you pass away, assets in a taxable account are 'stepped up' to current market value for your heirs. Because harvesting lowered your cost basis over the years, this step-up forgives the deferred tax on those embedded gains — the 'tax eraser' that makes harvested wealth permanent.
Yes. Realized capital gains raise MAGI, and crossing an IRMAA threshold (about $218,000 for couples in 2026) triggers a surcharge that isn't gradual — a single dollar over can cost $2,000+/yr. Offsetting gains with harvested losses keeps them off your return and below the cliff.
The step-up applies to the deceased spouse's assets. For jointly held accounts in most states, only half receives a step-up at the first death; the surviving spouse keeps their original basis on the other half. This should be modeled as part of your estate plan.
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