If you have ever sold an investment for a profit, you know it can trigger taxes. But what happens when you sell an investment at a loss? That’s where tax-loss harvesting comes into play. This method involves selling investments that have dropped in value to offset gains from other investments or reduce taxable income.
While it might sound like something only seasoned investors do, tax loss harvesting is a straightforward strategy that many individuals can use. In this guide, you will learn about tax loss harvesting, how it works, and how to apply it while following IRS rules.
What is tax-loss harvesting?
Tax-loss harvesting is a strategy you can use in a taxable account by selling investments at a loss to offset taxable gains from other investments. A capital gain happens when you sell an asset for more than you paid, while a capital loss occurs when you sell it for less. By realizing certain losses, you may be able to reduce your overall taxable income for the year, depending on your specific tax situation.
In practical terms, tax-loss harvesting is the process of selling investments at a loss and using that loss to lower your tax bill.
Here’s a quick example:
- You sell Investment A at a $4,000 gain.
- You sell Investment B at a $2,000 loss.
- You’re only taxed on $2,000 in net gains ($4,000 gain – $2,000 loss).
Tax-loss harvesting typically applies to taxable brokerage accounts. It doesn’t apply to tax-deferred or tax-exempt accounts like 401(k)s, IRAs, or Roth IRAs since their gains and losses aren’t taxed similarly.
How does tax-loss harvesting work?
To effectively apply tax loss harvesting, there’s a basic process you can follow to ensure compliance with IRS guidelines and maximize the potential benefits.
Step-by-step process of tax loss harvesting
You can start looking for investments currently trading below what you paid for them. These are called unrealized losses. You haven’t technically “lost” anything yet because the asset hasn’t been sold.
For example, if you purchased Stock A for $10,000 and its current value is $7,000, it represents an unrealized loss of $3,000.
2. Sell loss-making investments
Once you’ve identified the underperforming assets, sell them to realize the losses. Once sold, the loss becomes official and may be used to offset gains or income for tax purposes.
3. Offset capital gains
You can use realized losses to offset capital gains from other investments you’ve sold for a profit during the same tax year. Here’s how the IRS generally applies those losses:
- First, they offset capital gains of the same type—long-term losses against long-term gains and short-term against short-term.
- Then, if you have more losses than gains, you can apply up to $3,000 of those remaining losses to reduce your ordinary income for the year (or $1,500 if you are married and filing separately) according to 2025 IRS guidelines.
- Finally, any leftover losses can be carried forward to future tax years with no expiration limit.
For example: You realized $5,000 in long-term gains. Later, you sold a different holding and realized $8,000 in losses. $5,000 in losses cancel out $5,000 in gains. $3,000 in remaining losses can reduce your taxable income. Moreover, any loss beyond that is carried forward to use in future years.
4. Stay invested—but don’t trigger the wash-sale rule
To stay invested after selling a security at a loss, you might choose to reinvest the proceeds into a similar—but not substantially identical—investment.. This ensures compliance with the IRS’s wash-sale rule while keeping your portfolio aligned with your financial goals.
What is the Wash-Sale Rule?
One important IRS guideline to remember is the wash-sale rule when using tax-loss harvesting.
- You cannot claim a tax deduction for a loss if you repurchase the same or a “substantially identical” security within 30 days before or after selling it.
- For example, if you sell Stock A at a loss and repurchase it within 30 days, the IRS considers it a wash sale and disallows the loss for tax purposes.
So, how can you stay invested without triggering this rule? You may choose to:
- Reinvest in a similar but not identical investment—such as an ETF in the same sector
- Wait for 31 days before repurchasing the original asset again.
Note: The 30-day wash-sale window includes the day of the sale, 30 days after, and 30 days before—so be careful on both ends.
Capital gains & tax rate: Understand the basics
Capital gains and losses can help you build the foundation for determining what you may owe in taxes and how losses may help reduce that amount.
1. Understanding the holding period: Short vs. Long-term
Selling an investment for more than what you paid for is called a capital gain. But how long you held that investment determines how it’s taxed.
- Short-term capital gains come from selling investments held for one year or less. These gains are taxed at your ordinary income tax rate, which could be as high as 37% depending on your 2025 tax bracket.
- Long-term capital gains apply to investments held for more than one year. These are taxed at preferential rates: 0%, 15%, or 20%, depending on your income.
Tax-loss harvesting can apply to either type of gain, but the tax savings will depend on what kind of gain you’re offsetting.
2. How the IRS taxes gains in 2025
For 2025, the IRS applies lower tax rates to long-term capital gains. Here’s a quick look at the long-term capital gains brackets:
Short-term capital gains, by contrast, are taxed at your ordinary income rate, which can be much higher depending on your total income.
Tax-loss harvesting limits in 2025
Here’s a quick recap of the main limits to keep in mind in 2025:
These limits are based on current IRS guidelines and could be subject to change with future tax law updates.
Who may benefit from tax-loss harvesting?
Tax-loss harvesting may be more beneficial for certain types of investors:
- High-income individuals: If you’re in a higher tax bracket, offsetting gains or income may make a more significant impact.
- Investors with significant capital gains: Harvesting losses may help reduce those gains in the same year.
- People holding volatile or individual stocks: If you hold assets with wide price swings, you may spot more harvesting opportunities.
- For those who want to rebalance portfolios, selling losses may help realign your asset allocation.
Conclusion
Tax-loss harvesting isn’t a guarantee of saving money, but it may be useful to reduce your taxable income when used strategically. You can potentially smooth out your tax burden across years by realizing losses and applying them to offset gains or income.
Remember, this strategy works only in taxable investment accounts, and there are IRS rules—like the wash-sale rule—to navigate. As with any tax planning decision, consider speaking to a tax professional to determine whether it fits your broader financial picture.
If you manage your investments through a taxable brokerage account, platforms like Public.com can help you keep track of your portfolio activity. Public is an all-in-one brokerage where you can build a multi-asset portfolio that includes everything from stocks to options, bonds, crypto, HYCA, and IRA. You’ll gain access to a powerful suite of tools and data, including our Income Hub, which lets you track monthly earnings from all your interest and dividend-paying assets and forecast your income for the year ahead.
