Tax-loss harvesting turns a investment loss into a tax benefit — but two specific IRS rules (the $3,000 limit and the wash-sale rule) determine exactly how much benefit you actually get, and getting the wash-sale window wrong can erase the deduction entirely.

The Rules That Determine Your Actual Benefit

Realized capital losses first offset capital gains, dollar for dollar. Beyond that, you can deduct up to $3,000 per year against ordinary income ($1,500 if married filing separately). Losses beyond that carry forward indefinitely under IRC §1212 — they don't expire, and apply to future gains first, then $3,000/year against ordinary income after that. The wash-sale rule disallows the loss if you buy the same or a "substantially identical" security within a 61-day window — 30 days before and 30 days after the sale.

A wash sale doesn't destroy your loss permanently — it defers it, adding the disallowed amount to the cost basis of the repurchased shares. But if you want to stay invested in a similar asset while harvesting a loss, buying a different (not "substantially identical") fund tracking a similar index avoids the wash sale entirely — check with a tax professional on what counts as "substantially identical" for your specific securities, since this is a gray area the IRS hasn't precisely defined for every case.

Someone With Losses Exceeding $3,000: Don't assume the excess is wasted — it carries forward indefinitely, so track it carefully on your tax return year over year rather than losing record of it.

Someone Wanting to Stay Invested After Harvesting: Wait the full 30 days before repurchasing the identical security, or buy a similar-but-not-identical fund immediately if you don't want to be out of the market during the window.

Harvest Losses Correctly This Year

  1. Review your portfolio for positions currently at a loss before year-end.
  2. Calculate whether losses exceed your realized gains plus the $3,000 ordinary-income offset.
  3. If repurchasing anything similar, wait the full 30 days or choose a different fund to avoid the wash sale.
  4. Track any carryforward loss carefully for future tax years.

See Roth vs traditional retirement accounts — tax-loss harvesting applies to taxable brokerage accounts, not tax-advantaged retirement accounts.