Tax-Loss Harvesting
Realising a loss to offset a gain is a deferral rather than a saving, and the value of the deferral depends on the rate difference and on what is bought instead.
MadStockAlerts Research · Updated August 29, 2026
What to take away
- The technique realises a loss to offset realised gains in the same year.
- It lowers the basis of whatever is held afterwards, so the tax is deferred rather than removed.
- The wash sale rules constrain what can be bought in place of the sold position.
- The benefit is largest where a short-term gain is offset by a harvested loss.
- Transaction costs and time out of the market are real costs against the benefit.
MAD Academy Training Video · 0:45
Realising a Loss On Purpose
Harvesting converts a paper loss into a deduction against gains, and the value is real but smaller than it is often presented.
This lesson is part of a Stock Alerts + Tools plan.
What it actually does
Selling a position at a loss produces a realised loss, which offsets realised gains under the netting rules. That reduces the tax due for the year.
It does not reduce tax overall by the same amount, because the replacement position, or the reinvested proceeds, carries a lower basis. The eventual gain is correspondingly larger. What has been achieved is a deferral, plus any difference between the rate saved now and the rate paid later.
The deferral has real value: money not paid this year remains invested. Describing the technique as a saving rather than a deferral overstates it, and the size of the benefit depends on the rate difference and the time involved.
- Realise a lossWhich offsets realised gains under the netting rules
- Tax due this year fallsThe visible benefit
- The replacement carries a lower basisWhich is the deferred liability, made concrete
- A larger gain when it is eventually soldAt whatever rate applies then
Where the rate difference comes in
| Situation | Effect |
|---|---|
| Short-term loss offsetting a short-term gain | The largest benefit, since both are at ordinary rates |
| Loss offsetting a long-term gain | Smaller, since the gain would have been at preferential rates |
| Net loss beyond gains | A capped deduction against ordinary income, with the rest carried forward |
| Losses in a retirement account | No benefit. Nothing inside is a taxable event |
The last row is a structural point rather than a detail. A loss inside a tax-advantaged account produces nothing to harvest, because the account does not generate taxable gains in the first place.
The constraint that shapes it
The wash sale rules mean the sold position cannot simply be bought back. Anything substantially identical acquired within the sixty-one day window disallows the loss and adjusts the basis of the replacement.
- Staying out of the position for the window means accepting whatever it does during that time.
- Buying something related but not substantially identical keeps market exposure and introduces tracking difference.
- Automatic reinvestment and scheduled contributions have to be considered, since they buy without instruction.
- Purchases in other accounts, including a spouse's, are within the rule and outside the broker's view.
The second item is where the grey area sits. Whether two funds tracking the same index are substantially identical has never been settled authoritatively, and it is a question for a professional rather than for a general description.
The costs on the other side
- Transaction costs on both the sale and the eventual repurchase, including the spread.
- Any market movement during the period out of the position, in either direction.
- A lower basis afterwards, which is the deferred liability made concrete.
- The record-keeping burden of additional lots and any disallowed amounts.
Whether the deferral exceeds these costs depends on the amounts, the rates and the horizon involved. This describes how the rules are structured and is not tax advice. Tax rules change, they interact, and the treatment of any particular situation depends on circumstances that only a qualified professional can assess.
When the deferral can become permanent
Harvesting is generally a deferral, and there are circumstances in which the deferred liability is never paid. Those circumstances are what make the technique more than a timing exercise.
- Losses carried forward can offset gains realised in later years at a higher rate than the one saved.
- A position held until death may receive a step-up in basis under the current rules, which would eliminate the deferred gain.
- A position donated to a qualifying charity is treated under separate rules that turn on the appreciated value.
- A year in which income falls into a lower long-term bracket changes the rate the deferred gain eventually attracts.
Every one of these depends on rules that change and on personal circumstances. They are stated here to make clear that the deferral's value is not fixed, not to suggest any of them as a plan. This describes how the rules are structured and is not tax advice. Tax rules change, they interact, and the treatment of any particular situation depends on circumstances that only a qualified professional can assess.
The corresponding risk runs the other way: a deferred gain realised in a year of higher rates costs more than was saved, and rates are not knowable in advance.