What is the wash sale rule?

The wash sale rule prevents you from claiming a tax loss if you buy the same or 'substantially identical' security within 30 days before or after selling at a loss. If triggered, the loss is disallowed but added to your cost basis in the new shares.

What counts as 'substantially identical'?

The IRS has never precisely defined the term. Repurchasing the identical security — or options or contracts to acquire it — is clearly covered. Two index funds tracking the same index from different issuers are commonly treated by practitioners as not substantially identical, but the IRS has not confirmed that position, so it carries risk rather than certainty.

Does buying the security in my IRA trigger a wash sale?

Yes, and it is the worst version of the trap. Under Rev. Rul. 2008-5, buying the same or substantially identical security in your IRA within the 61-day window disallows the loss in your taxable account — and there is no basis adjustment inside the IRA, so the loss is destroyed permanently rather than deferred.

Do wash sale rules apply to cryptocurrency?

Not under current law: IRC §1091 covers stock or securities, and the IRS treats crypto as property. But H.R. 10357, the Digital Asset Tax Certainty Act, would extend the wash-sale rule to traded digital assets for sales after September 14, 2026. The House Ways and Means Committee approved it 38-5 on September 16, 2026; it has not passed the House or the Senate. If it becomes law as approved, a crypto loss sold after September 14, 2026 and bought back within 30 days would be a wash sale, so the loss would be disallowed and added to the new basis.

Should I harvest short-term or long-term losses?

It depends on which gains you have. Short-term losses first offset short-term gains (taxed at ordinary income rates up to 37%), and long-term losses first offset long-term gains (taxed at 0%, 15%, or 20%). A net loss of either kind then offsets the other kind of gain. So a short-term loss saves more per dollar only when you have short-term gains for it to offset; against long-term gains it saves the long-term rate, the same as a long-term loss. Any net loss left after all gains reduces ordinary income by up to $3,000 ($1,500 married filing separately) and the rest carries forward.

What's the $3,000 capital loss limit?

After offsetting all your capital gains, you can deduct up to $3,000 of excess capital losses against ordinary income each year ($1,500 if married filing separately). Any remaining losses carry forward to future years—indefinitely.

When should I harvest losses?

Year-end is popular for tax planning, but don't wait if you have significant gains to offset. Consider harvesting throughout the year when opportunities arise. Monitor your positions and be mindful of the 30-day wash sale window.

Tax-Loss Harvesting Guide 2025

Turn investment losses into tax savings

Updated August 24, 2026Reviewed for 2025 & 2026 tax yearsIRS-sourcedReviewed by Adam Khale

Tax-loss harvesting is a powerful strategy to reduce your tax bill by selling losing investments to offset capital gains. This guide explains the wash sale rule, how to harvest losses effectively, cryptocurrency considerations, and step-by-step examples.

$3,000

annual ordinary income offset from excess losses

About Our Editorial Process

How does tax-loss harvesting work?

Sell investments at a loss to offset capital gains. Losses first offset gains dollar-for-dollar. Excess losses offset up to $3,000 of ordinary income per year. Remaining losses carry forward indefinitely. Beware the wash sale rule: don't buy the same security within 30 days before or after the sale.

•Losses offset unlimited capital gains
•$3,000 max against ordinary income per year
•30-day wash sale window (61 days total)

Calculate Capital Gains

Tax-loss harvesting is one of the few legal ways to manufacture deductions out of thin air. Sell a losing position, claim the loss, immediately re-establish similar (but not 'substantially identical') exposure. The trap is the 30-day wash sale window on either side of the sale — and the rule applies across IRAs, spousal accounts, and broker line items.

Real-world scenario

Tech investor harvests $40K of losses in a flat market

He sells QQQ at a $40K loss in November, immediately buys VGT (a similar but not substantially identical tech ETF). $3,000 of losses offset ordinary income this year; remaining $37K carries forward indefinitely against future capital gains. At 24% federal, year-one cash value: $720. Long-term value as future gains accumulate: easily $9K+ over a decade.

The part most people miss

Crypto is not subject to the wash-sale rule under current law, but H.R. 10357 (approved by Ways and Means 38-5 on Sept 16, 2026) would apply it to crypto sales after September 14, 2026 if enacted as approved. A sell-and-rebuy harvest this fall could be disallowed retroactively. To limit the risk, wait 31 days before buying back, or buy back a different asset.

What is Tax-Loss Harvesting?

Tax-loss harvesting is the strategy of selling investments that have declined in value to realize a capital loss. These losses can then be used to:

Offset capital gains — Dollar-for-dollar, no limit
Reduce ordinary income — Up to $3,000 per year ($1,500 if MFS)
Carry forward — Unused losses carry forward indefinitely

Example: Tax-Loss Harvesting in Action

You have $20,000 in capital gains and $8,000 in capital losses.

• Net gain: $20,000 - $8,000 = $12,000 taxable gain
• At 15% LTCG rate: $1,200 saved in taxes

The Wash Sale Rule

The IRS wash sale rule disallows a loss deduction if you purchase the same or substantially identical security within:

30 days before → Sale Date → 30 days after

(61-day total window)

What triggers a wash sale?

• Buying the same stock or fund within 30 days
• Buying a "substantially identical" security — clearly including options or contracts to acquire the same stock
• Acquiring via options, IRA, or spouse's account

What is generally understood not to trigger a wash sale

• Selling Apple stock, buying Microsoft stock (different securities)
• Selling an S&P 500 ETF and buying a total-stock-market fund (different index, different holdings)
• Waiting 31+ days to repurchase the same security

How settled is "substantially identical"?

Less settled than most articles imply. The IRS has never issued a precise definition, and there is no bright-line test. What is clear: repurchasing the identical security, or options and contracts to acquire it, is covered. What is not confirmed: two funds from different issuers that track the same index. Many practitioners treat those as not substantially identical because the funds are legally distinct issues, and the IRS has not publicly challenged the position — but it has also never blessed it. Treat that swap as a common practice with residual risk, not as settled law, and use a genuinely different index if you want to remove the question entirely.

61-Day Window Checker

Enter the date you sold (or plan to sell) at a loss. The checker returns the exact calendar dates during which buying the same or substantially identical security — in any account you or your spouse control, including IRAs — would disallow the loss.

Sale date

Pick a sale date to see the window.

The IRA Repurchase Trap: A Permanently Destroyed Loss

Every other wash sale is a deferral. The disallowed loss gets added to the basis of the replacement shares, so you recover it whenever you eventually sell them. There is one exception, and it is brutal.

Rev. Rul. 2008-5: if you sell a security at a loss in a taxable account and buy the same or substantially identical security in your traditional or Roth IRA within the 61-day window, the loss is disallowed — and no basis adjustment is made to the IRA. There is nowhere for the loss to go. It is gone permanently.

• Applies to traditional IRAs and Roth IRAs alike.
• Automatic reinvestment and recurring IRA contributions are the usual cause — the purchase does not have to be deliberate.
• Your broker generally will not flag this: wash sale reporting on Form 1099-B is per-account, and cross-account (taxable → IRA) matching is your responsibility.
• Practical defense: pause automatic IRA purchases of the security for the full 61 days, or harvest into a genuinely different index.

How to Harvest Tax Losses

Identify losing positions

Review your taxable investment accounts for positions currently trading below your cost basis (purchase price).

Calculate potential tax savings

Estimate savings in layers. Losses first offset gains: each dollar that offsets a short-term gain saves your ordinary marginal rate, and each dollar that offsets a long-term gain saves that gain's 0%, 15% or 20% rate; add 3.8% if the gain was subject to NIIT. Any net loss left after that reduces ordinary income by up to $3,000 ($1,500 married filing separately) this year at your marginal rate. The rest carries forward, so it is not a saving this year. Prioritize short-term losses when you have short-term gains to offset.

Sell the losing investment

Execute the sale in your brokerage account. The loss is realized on the sale date.

Wait 31 days (or buy similar asset)

To avoid wash sale, wait 31 days before rebuying the same security—or immediately buy a similar investment that is not substantially identical (for example, a fund tracking a different index).

Offset gains and income

Losses first offset capital gains. Excess losses offset up to $3,000 in ordinary income. Remaining losses carry forward.

How Losses Offset Gains (Order of Application)

The IRS applies losses in a specific order:

Short-term losses offset short-term gains first

Long-term losses offset long-term gains first

Net short-term offsets net long-term (or vice versa)

Remaining net loss offsets $3,000 ordinary income

Excess losses carry forward to next year

Pro tip: Short-term losses are more valuable when you have short-term gains to offset, because they absorb those gains (taxed at up to 37%) first. With only long-term gains, a short-term loss saves the long-term rate (up to 20%), the same as a long-term loss.

Cryptocurrency: No Wash Sale Under Current Law

Current law: Under current law, wash sale rules do not apply to cryptocurrency because the IRS classifies crypto as property, not securities.

What This Means

• Under current law, selling crypto at a loss and buying it back does not trigger the wash-sale loss disallowance.
• If H.R. 10357 is enacted as approved, a crypto loss sale after September 14, 2026 followed by a buyback within 30 days would be a wash sale.
• Harvest crypto losses to offset gains, and treat a quick buyback this fall as at risk.

Pending bill: H.R. 10357

H.R. 10357 would extend the wash-sale rule to crypto sales after September 14, 2026. Ways and Means approved it 38-5 on September 16, 2026; it is not law yet. If it is enacted as approved, a sale-and-rebuy this fall could lose the loss.

Calculate your crypto taxes

Best Practices for Tax-Loss Harvesting

Harvest year-round

Don't wait until December—opportunities arise throughout the year

Replace with similar (not substantially identical)

Stay invested by buying a similar ETF or fund to maintain market exposure

Track cost basis carefully

Use specific lot identification to harvest the highest-cost shares first

Consider transaction costs

Ensure tax savings exceed any commissions or bid-ask spreads

Watch for auto-reinvestment

Dividend reinvestment can trigger wash sales—consider pausing DRIP

Document everything

Keep records of purchase dates, prices, and sale dates for your tax return

Frequently Asked Questions

Sources & References

Primary references used for this content

Topic No. 409

Capital Gains and Losses

View on irs.gov

Publication 550

Investment Income and Expenses

Investment taxation