Quick Answer

Investment losses are never the goal, but a loss in a taxable investment account may create a tax-planning opportunity. Tax-loss harvesting involves selling an investment below its tax basis so the realized loss can be used against capital gains and, within limits, other income.

The key is to make the tax decision without losing sight of the investment plan.

How Tax-Loss Harvesting Works

An investment declining in value does not automatically create a deductible loss.

The loss generally becomes relevant for tax purposes when the investment is sold. If you sell an investment in a taxable account for less than its adjusted basis, you generally realize a capital loss.

Capital losses can be used to offset capital gains. If your total capital losses exceed your capital gains for the year, an individual may generally deduct the lesser of $3,000—or $1,500 if married filing separately—or the remaining net capital loss against other income.

That can make tax-loss harvesting particularly useful in a year when other investments have generated substantial realized gains.

What Happens to Losses You Cannot Use This Year?

A capital loss does not necessarily disappear because it is too large to use immediately.

If a net capital loss exceeds the annual deduction allowed against other income, the unused amount can generally be carried forward to later tax years. It may then be available to offset future capital gains and potentially the annual amount permitted against other income.

This means a loss realized during one market cycle could remain relevant to tax planning years later.

Be Careful With the Wash-Sale Rule

Selling an investment solely for the tax loss and immediately buying it back can create a problem.

Under the federal wash-sale rule, a loss from stock or securities generally is not currently deductible when substantially identical stock or securities are acquired within the period beginning 30 days before the loss sale and ending 30 days after it.

The rule can also apply in circumstances involving purchases by a spouse or purchases of substantially identical securities inside an IRA or Roth IRA.

The phrase “substantially identical” is important. Investors should be cautious about assuming that two investments are different enough simply because they have different ticker symbols.

Tax-Loss Harvesting Should Not Drive the Portfolio

Tax-loss harvesting is primarily relevant to taxable investment accounts. Trades occurring within accounts such as IRAs and 401(k) plans generally do not create currently deductible capital losses.

It is also important to recognize what tax-loss harvesting does—and does not—accomplish.

Selling at a loss and reinvesting in a different security may lower current taxes, but the replacement investment begins with its own tax basis. If that investment later appreciates and is sold, some of the tax may simply have been deferred rather than eliminated.

For that reason, tax-loss harvesting should generally be viewed as a tax-management tool, not as a reason to make an investment decision that conflicts with the portfolio’s long-term objectives.

Look Beyond December

Tax-loss harvesting often receives attention near year-end, but opportunities can occur throughout the year.

Periods of market volatility can create losses in individual securities, asset classes, or tax lots even when the overall portfolio has performed well. Reviewing tax lots periodically may provide more flexibility than waiting until the final weeks of December.

A coordinated approach can also consider expected capital gains, charitable giving, portfolio rebalancing, and other tax-planning decisions before executing trades.

The Planning Takeaway

A market decline may create an opportunity to improve the tax efficiency of a portfolio, but the tax savings should support the investment strategy—not replace it.

Before realizing a loss, consider the security being sold, the replacement investment, wash-sale exposure, existing gains, loss carryforwards, and the portfolio’s intended allocation.

Frequently Asked Questions

How much capital loss can I deduct against ordinary income?
For individuals, if capital losses exceed capital gains, the annual deduction against other income is generally limited to $3,000, or $1,500 for married individuals filing separately.

Do unused capital losses expire at year-end?
No. Unused net capital losses generally can be carried forward to future years under the applicable tax rules.

What is the 30-day wash-sale rule?
A loss on stock or securities can be disallowed when substantially identical stock or securities are acquired within 30 days before or after the loss sale.

Can I tax-loss harvest inside my 401(k)?
Tax-loss harvesting is generally a taxable-account strategy because gains and losses generated by normal trading inside tax-advantaged retirement accounts are not recognized in the same way for current federal income-tax purposes.

This material is educational and does not constitute individualized investment or tax advice. Tax-loss harvesting involves investment, tax, and transaction-specific considerations.

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