Tax-Loss Harvesting: Using Investment Losses to Cut Your Tax Bill
How losses offset gains, the $3,000 a year against income, a worked example and the 30-day wash-sale rule.
By the MoneyBackKit team · Updated October 27, 2026 · 4 min read
Tax-loss harvesting means selling an investment that's down to use the loss against your gains. It doesn't make a bad investment good, but it can cut this year's tax bill, and losses you can't use carry forward forever.
How losses are used
- Losses first cancel gains of the same kind (short-term against short-term, long-term against long-term), then the other kind.
- If losses are bigger than gains, up to $3,000 a year ($1,500 if married filing separately) comes off your ordinary income.
- Anything left carries forward to future years.
Example: single, $85,000 income, $10,000 long-term gain
| Tax on gains | |
|---|---|
| Sell the winner only | $1,500 |
| Also sell a fund with a $6,000 loss | $600 |
| Saved | $900 |
And if the loss had been bigger than the gain, using $3,000 against salary at a 22% rate would save about $660 more this year.
The wash-sale trap
- If you buy the same or a "substantially identical" investment within 30 days before or after the sale, the loss is disallowed for now.
- That includes buying it back in your IRA or your spouse's account.
- A common approach is to switch to a similar fund that tracks a different index, then switch back after 31 days if you want.