Tax-Loss Harvesting Explained: When Selling at a Loss Saves You Money

Updated July 21, 2026

The 3-Step Tax-Loss Harvesting Playbook

Recommended reading: Tax-Loss Harvesting

1. Identify Losing Assets

Start by reviewing your brokerage statements. Look for investments that have declined since purchase. The Standard & Poor’s (S&P) 500's 1.7% drop means many index funds are sitting on paper losses. For example, if you own SPDR S&P 500 exchange-traded fund (ETF) (SPY) at $430 per share, and it's now $420, you have a $10/share loss. Multiply by shares owned to get your total deductible loss. (If you're holding individual stocks, look for companies that underperformed their sector—like Meta if you're holding Amazon.)

Example: You own 50 shares of VTI (Vanguard Total Stock Market ETF) at $200/share. If it's now $180, that's a $1,000 loss. Selling those shares lets you deduct $1,000 from taxable income or capital gains. If you're in the 24% bracket, that's a $240 tax break. (Federal Reserve Economic Data (FRED)'s 4.13% Treasury yield means your alternative investment in T-bonds won't eat that $240, so the strategy is still a win.)

2. Reinvest Strategically

After selling the losing asset, you can't just buy it back. But you can buy similar assets. If you sold SPY, consider buying the iShares Core S&P 500 ETF (IVV) or a broader market fund like VTI. The IRS allows this if the new investment isn't “substantially identical” (a term they never define, but you can thank the courts for giving us some wiggle room).

Real-world scenario: You sold SPY and want to stay invested. Buy a global index fund like VT (Vanguard Total World Stock ETF) at $138/share. This keeps you in the market while avoiding the wash-sale rule. (The 10-Year Treasury yield is 4.13%—if you stick with bonds, you'll earn less than the 6% average annual return of the S&P 500, so staying invested matters.)

3. Use Losses to Offset Gains

If you have capital gains from selling winning investments, use your losses first. Let's say you sold a stock for a $10,000 gain and have a $5,000 loss. The net gain is $5,000, taxed at your capital gains rate. Without the loss, the full $10,000 would be taxed. (At 15% long-term capital gains rates, you saved $750.) For related context, see Max Your 401(k) or Pay Off Debt First in 2026?. And remember the brackets cut both ways: in a lower-income year you can harvest gains tax-free — our analysis of how much capital gain fits in the 0% bracket in 2026 shows exactly how much headroom you have.

: If you have more losses than gains, you can deduct up to $3,000 from ordinary income. The rest gets carried forward to future years. For example, if you have $10,000 in losses and no gains to offset, you can deduct $3,000 in 2026, $3,000 in 2027, $3,000 in 2028, and the remaining $1,000 in 2029. That's $10,000 in total deductions over four years. At the 24% tax bracket, that works out to $2,400 in tax savings. (The deduction reduces your taxable income — multiply by your tax rate to get the actual dollars saved.)

The Wash-Sale Rule: Don't Be an Idiot

Here's where most people mess up. The IRS says you can't buy back the same security within a 61-day window around the sale — that's 30 days before, the sale date itself, and 30 days after. If you do, the loss gets disallowed, and you're stuck with the paper loss. (The IRS treats it like you're trying to game the system—so don't.)

Example: You sell 100 shares of AAPL on March 1, 2026, for a $2,000 loss. If you buy AAPL again between February 1 and March 31, 2026, it's a wash sale. The $2,000 loss disappears, and you have to wait until April 1 to buy back. (FRED's 3.64% Federal Funds rate might make you lose sleep over the opportunity cost, but the IRS won't care.)

How to avoid this? Use a different ETF. If you sold SPY, buy IVV. If you sold VTI, buy ITOT (iShares Core S&P Total U.S. Stock Market ETF) or SCHB (Schwab U.S. Broad Market ETF) — both track the total U.S. stock market, so you maintain the same broad exposure without triggering a wash sale. The IRS hasn't ruled on “substantially identical” for exchange-traded funds (ETFs), but replacing one total-market fund with a comparable total-market fund from a different provider is a safer bet than trying to replace AAPL with MSFT. (Also, check with your broker—some platforms like Fidelity have automated tools to flag potential wash sales.)

Recommended reading: Schwab

Real-World Example: How a $5,000 Loss Cut Your Tax Bill

Let's walk through a full example. You own 100 shares of XYZ stock bought at $50/share. It's now $40/share. You sell the 100 shares for a $1,000 loss — that's 100 shares × ($50 − $40) = $1,000. You're in the 24% tax bracket. Here's how the math works:

• Capital gains this year: $5,000 (from selling another stock)
• Loss from XYZ sale: $1,000
• Net gain: $5,000 – $1,000 = $4,000
• Tax on net gain: If those gains are long-term, you likely pay 15% — that's $600 in taxes on $4,000 instead of $750 on $5,000. The $1,000 loss saved you $150.
• If the gains are short-term: At the 24% ordinary income rate, you'd owe $960 instead of $1,200 — saving $240.

What if your losses exceed your gains? Say you had $6,000 in losses and $1,000 in gains. After offsetting the gains, you have a $5,000 net loss. You deduct $3,000 against ordinary income in 2026 and carry forward the remaining $2,000 to 2027. (That $3,000 cap has been frozen since 1978 — Canopy Press charts the capital-loss deduction limit's history and real-dollar erosion.) At the 24% marginal rate, that's $720 saved in 2026 and $480 saved in 2027 — $1,200 in total tax savings over two years. Not a fortune, but it's money the IRS would have kept otherwise.

Now, the alternative: If you held onto XYZ, you'd have a $1,000 paper loss but no tax savings. The stock might rebound, but in a market where the 10-Year Treasury yield is 4.13%, waiting could eat into your returns. (If XYZ drops to $30/share, your loss grows to $2,000—but you still get no tax break until you sell.)

Rebalancing After Harvesting

Once you've harvested losses, you need to rebalance your portfolio. If you sold a stock to take the loss, you're now underweight in that asset. For example, if you sold SPY to take a loss, you might want to buy a different ETF to stay invested. (If you're a fan of the market, IVV is a good choice. If you want diversification, consider VXUS for international stocks.)

Example: You had 10% of your portfolio in SPY. After selling it, you now have 0%. To rebalance, you might buy IVV to maintain the same S&P 500 exposure, or shift into VXUS or a bond fund like BND if you want to diversify. (The 6.00% 30-Year Mortgage Rate might make bonds look less attractive, but the 4.13% Treasury yield is still better than cash.)

: Use tax-loss harvesting to rebalance. If you have a loss in SPY and want to shift to international stocks, you can sell SPY and buy VXUS. This rebalances your portfolio while taking the tax loss. (The 19.6% jump in gold prices—Yahoo Finance—means commodities could be another diversifier, but they're more volatile.)

Advanced Strategies: Wash-Sale Workarounds

For those who want to get creative (and stay within the law), there are a few advanced strategies. One is to use inverse ETFs. If you sell a stock for a loss, you can buy an inverse ETF to hedge your position without violating the wash-sale rule. For example, if you sold AAPL for a loss, you could buy the ProShares Short S&P 500 (SH) to bet against the market. (SH is a -1x used ETF, so it moves opposite the S&P 500. If the market drops, SH gains.)

Recommended reading: Pros

Another option: Buy a different ETF that tracks a comparable index. If you sold SPY, buy IVV. If you sold VTI, buy ITOT or SCHB — they track the same broad U.S. stock market, so your portfolio allocation stays intact. Avoid swapping a total-market fund for a narrow sector fund like XLK (Technology Select Sector SPDR Fund), which holds only ~70 tech stocks. That kind of swap dramatically changes your risk profile. The IRS hasn't ruled on whether broad-market ETFs from different providers are “substantially identical,” but it's a safer bet than buying AAPL again. (The VIX is up 103.2% YTD—Yahoo Finance—so sector-specific ETFs could help you target areas of the market with higher volatility, but use them intentionally, not as a wash-sale workaround.)

The key: Don't buy the exact same asset. Replace it with something similar but not identical. (If you sold VTI and want to stay in total stock market, try ITOT or SCHB — different provider, same broad market exposure.)

The Bottom Line: Don't Let Your Losses Go to Waste

Tax-loss harvesting isn't just for Wall Street pros. It's a tool anyone can use to reduce their tax bill in a down market. The S&P 500's 1.7% drop and the 19.6% jump in gold prices (Yahoo Finance) mean there are plenty of opportunities to turn losses into tax savings. Just remember to avoid the wash-sale rule and rebalance your portfolio after harvesting. (And if you're still confused, Fidelity, Vanguard, and Schwab all offer automated tax-loss harvesting tools for a fee.)

Action steps for 2026:

1. Review your brokerage statements for losing investments
2. Sell them between now and April 15 (2026 tax deadline) to lock in losses
3. Replace them with comparable ETFs from a different provider to maintain your allocation
4. Use the tax savings to fund your 2026 goals (or a new Tesla)

The IRS isn't going to hand you money, but it will let you save thousands by harvesting your losses. In a market where the 10-Year Treasury yield is 4.13% (FRED), every tax dollar saved is a dollar you can reinvest. So don't let your losses go to waste—turn them into a tax break you can use today. (And if you're still holding onto those losing stocks, you're just giving the IRS a free pass to take more of your money.)

Updated March 27, 2026: Corrected factual errors.

Loss harvesting is one lever; for the rest of the toolkit, see how tax deductions can save you thousands in 2026.

Where you hold assets matters as much as when you harvest; see the index fund vs ETF showdown on tax efficiency.

Found an error? At Canopy Press, accuracy comes first. If you spot a claim that needs checking, let us know at [email protected] — we'll verify and correct it immediately.

Sources

• Internal Revenue Service (IRS)
• Federal Reserve Economic Data (FRED)
• Federal Reserve
• Yahoo Finance
• Vanguard
• Fidelity Investments
• S&P Global
• Charles Schwab
• ETF
• SPY