If you sold winning investments this year, you likely face a capital gains tax bill. Tax-loss harvesting lets you reduce that liability by strategically selling losing positions before December 31 to offset your gains. This year-end tax strategy can lower your taxable income and keep more money in your portfolio.

The December 31 deadline is firm. For a sale to count toward this year’s taxes, the trade must settle by year-end (typically, you need to place the sell order by late December to allow for standard settlement times). Missing the deadline means waiting another full year to capture those losses.

What Tax-Loss Harvesting Is

Tax-loss harvesting is selling investments that have declined in value to realize a capital loss, which you then use to offset capital gains from profitable sales. According to the IRS, capital losses directly reduce capital gains dollar-for-dollar (Internal Revenue Service, 2026). If your losses exceed your gains, you can deduct up to $3,000 of the excess against ordinary income and carry forward any remaining losses to future tax years.

For example, if you sold stocks for a $10,000 gain and have another holding down $4,000, selling the losing position generates a $4,000 loss. Your net taxable gain drops to $6,000, saving you roughly $900 to $1,200 in federal taxes depending on your capital gains rate (15% or 20% for most investors).

The fundamental concepts of investment taxation covered in foundational texts such as Principles of Finance explain that realized losses hold tax value even when your portfolio’s overall return is positive.

How to Harvest Tax Losses Before Year-End

1. Review Your Taxable Account for Unrealized Gains and Losses

Start by generating a capital gains report from your brokerage (most brokers offer a year-to-date gains/losses statement). This shows which positions you sold for a gain (short-term or long-term) and the total dollar amount. Only taxable brokerage accounts count; losses in IRAs, 401(k)s, and other retirement accounts cannot be harvested because those accounts are already tax-deferred.

Identify holdings currently trading below your purchase price (cost basis). These are candidates for harvesting.

2. Prioritize Short-Term Losses to Offset Short-Term Gains

Short-term capital gains (assets held one year or less) are taxed as ordinary income, with federal rates up to 37%. Long-term gains (held more than one year) are taxed at preferential rates of 0%, 15%, or 20%. According to SEC investor education resources, the IRS requires you to match short-term losses against short-term gains first, and long-term losses against long-term gains first (U.S. Securities and Exchange Commission, 2026). Any excess loss can then offset the other type.

If you have $8,000 in short-term gains, prioritize harvesting short-term losses to offset that higher-tax-rate income.

3. Sell the Losing Positions

Place sell orders for the investments you have identified. The sale must settle by December 31, so check your brokerage’s year-end trading calendar. U.S. stocks and ETFs typically settle in two business days (T+2), meaning the last trading day to guarantee settlement by December 31 is usually around December 27 or 28, depending on weekends.

You can sell individual lots if you want to fine-tune the loss amount (most brokers let you specify which tax lot to sell). Selling the highest-cost-basis shares maximizes your loss.

4. Avoid the Wash-Sale Rule

The IRS wash-sale rule disallows the tax loss if you repurchase the same security (or a substantially identical one) within 30 days before or after the sale. This 61-day window (30 days before, the sale date, and 30 days after) is strictly enforced (Investopedia, 2026).

Violating the rule means the loss is deferred and added to the cost basis of the replacement shares, eliminating the immediate tax benefit.

Read also: Capital Gains Tax Calculator: Short-Term vs Long-Term Rates Explained

To maintain market exposure without triggering a wash sale, you can:

  • Sell an S&P 500 ETF and immediately buy a similar but not identical total-market ETF.
  • Wait 31 days, then repurchase the original security.
  • Buy a different stock in the same sector (selling one tech stock and buying another is generally safe, as individual stocks are not substantially identical).

Do not repurchase the exact same ticker within the 30-day window.

5. Consider Harvesting Even Without Gains This Year

If you have no capital gains this year, you can still harvest losses to claim the $3,000 annual deduction against ordinary income (such as wages or interest). Excess losses carry forward indefinitely to offset future gains or take the $3,000 deduction in future years. This makes loss harvesting valuable even in down-market years when you sold nothing for a gain.

6. Document Everything

Keep records of the sale confirmations, cost basis, and the date you repurchase any replacement securities. The IRS requires you to report capital gains and losses on Schedule D of Form 1040. Your brokerage will send a Form 1099-B after year-end listing all sales, but you are responsible for calculating and reporting wash-sale adjustments if your broker does not track them across accounts.

Common Mistakes to Avoid

Do not harvest losses in tax-advantaged accounts (IRAs, 401(k)s). Those losses generate no tax benefit.

Do not forget the 30-day waiting period. Setting a calendar reminder for 31 days after the sale prevents accidental wash-sale violations.

Do not let the tax tail wag the investment dog. Only harvest losses on positions you are willing to sell for investment reasons or are comfortable replacing with a similar holding. Selling a strong long-term position solely for a small tax benefit can hurt your overall returns.

Practical Next Steps

Run your brokerage’s unrealized gains/losses report now. Identify positions with meaningful losses (at least a few hundred dollars, so the tax benefit justifies the effort). Calculate whether you have capital gains to offset or will use the $3,000 ordinary income deduction. Plan your replacement purchases if you want to maintain exposure, ensuring they are not substantially identical to what you are selling.

Execute the sales with enough time for settlement before December 31, and mark your calendar to avoid repurchasing the same security within 30 days.

This information is educational and not personalized tax advice. Tax rules vary by individual circumstance; consult a CPA or tax advisor to confirm how tax-loss harvesting applies to your specific situation, especially regarding state taxes, AMT considerations, and carryforward tracking.