How to Execute a Tax Loss Harvesting Strategy

If you have a taxable brokerage account and realized capital gains this year, you can sell underperforming positions to offset those gains and reduce your tax bill. This is tax loss harvesting — one of the most accessible strategies for investors at any income level. It works in any tax bracket and pairs well with a year-round planning calendar to catch opportunities before year-end.

Key Takeaways

• Harvest losses before December 31 to offset this year's capital gains.
• Short-term losses are more valuable — they offset gains taxed at up to 37%.
• TLH is primarily a tax deferral. The net benefit depends on the time value of money and rate differentials.
• Replace sold positions with a similar (not identical) fund to stay invested and avoid wash sales.

The Math: A Worked Example

Sarah’s situation: Single filer, 24% marginal bracket, 15% LTCG rate. She has:

• $25,000 in long-term capital gains from selling appreciated stock
• $8,000 in short-term capital gains from a trade earlier this year
• $18,000 in unrealized losses across several positions in her portfolio

Without tax loss harvesting:

• Tax on LT gains: $25,000 × 15% = $3,750
• Tax on ST gains: $8,000 × 24% = $1,920
• Total tax: $5,670

With tax loss harvesting (sells $18,000 in losers):

1. $8,000 offsets short-term gains at 24% → saves $1,920
2. $7,000 offsets long-term gains at 15% → saves $1,050
3. $3,000 offsets ordinary income at 24% → saves $720
4. Immediate tax savings: $3,690

But wait — the basis reset cost: Sarah’s replacement securities now have a $18,000 lower cost basis. When she eventually sells them (assume 10 years later at 15%), she’ll owe an extra $2,700 in tax. Discounted to today at 4%, that future cost is about $1,824.

Net benefit: $3,690 − $1,824 = $1,866

That is real money saved through the time value of deferral — and Sarah stayed fully invested the entire time.

IRS Limits Reference (2025 vs 2026)

There are no income limits or phase-outs for tax loss harvesting. Anyone with a taxable brokerage account can use this strategy.

Short-Term vs Long-Term: Which Losses Are More Valuable?

Not all harvested losses save the same amount of tax:

• Short-term losses offset short-term gains taxed at ordinary income rates (up to 37%). These are the most valuable losses to harvest.
• Long-term losses offset long-term gains taxed at 0%, 15%, or 20%. Still valuable, but the tax rate is lower.
• Losses offset gains of the same type first (ST losses → ST gains, LT losses → LT gains), then cross over.

Prioritize harvesting short-term losses when possible — the tax savings per dollar of loss is roughly 2× compared to long-term losses for most taxpayers.

The Basis Reset: What TLH Really Does

Tax loss harvesting is primarily a tax deferral, not a permanent tax elimination. Here is why:

1. You sell Security A at a $10,000 loss and buy similar Security B for the same price.
2. Security B now has a $10,000 lower cost basis than Security A had.
3. When you eventually sell Security B, you will realize $10,000 more in gains and owe more tax.

So why bother? Two reasons:

• Time value of money. A dollar of tax saved today is worth more than a dollar of tax paid in 10-20 years. At a 4% discount rate over 10 years, the present value of that future tax is about 68 cents — a 32% discount.
• Rate differential. If your future capital gains rate is lower than your current rate (for example, you retire into a lower bracket), the net savings are permanent.

Even if your rates stay the same, the time value of deferral makes TLH worthwhile for most investors with meaningful gains.

Replacement Securities: Staying Invested

After selling a losing position, reinvest the proceeds immediately in a similar but not substantially identical fund. This keeps your portfolio allocation intact while capturing the tax benefit.

You must wait at least 31 days before repurchasing the original security to avoid the wash sale rule. For details on compliant replacement strategies, see our Tax Loss Harvesting Guide and Wash Sale Rule Explained.

When NOT to Harvest

Tax loss harvesting is not always the right move:

• You are in the 0% LTCG bracket (taxable income below ~$47,025 single / ~$94,050 MFJ in 2025). Harvesting long-term losses provides no immediate benefit. Consider tax-gain harvesting instead — selling winners at 0% to reset your basis higher. See our capital gains tax rates guide for the full bracket table.
• You expect a higher future capital gains rate. If your rate will increase significantly, the basis reset cost may exceed the current tax savings.
• Trading costs are high. Bid-ask spreads and commissions on thinly traded securities can eat into the benefit.
• You plan to repurchase the same security within 30 days. This triggers a wash sale and disallows the loss entirely.

DIY Checklist: Forms You Will Need

Forms and records

• Form 1099-B from your brokerage (reports sales proceeds and cost basis)
• Form 8949 (Sales and Dispositions of Capital Assets) — itemize each transaction
• Schedule D (Capital Gains and Losses) — summarize net gains/losses
• Brokerage tax lot reports — verify cost basis and holding periods

Questions to answer before harvesting

• Do I have positions with unrealized losses in my taxable accounts?
• Are any of those losses short-term (held less than 1 year)? Prioritize those.
• Do I have capital gains this year that these losses can offset?
• Will I avoid repurchasing the same security within 30 days?
• Is my current LTCG rate above 0%?

How sharper.tax Helps

Upload your tax return and sharper.tax automatically detects capital gains and losses from Schedule D. We calculate your potential TLH savings at your actual marginal rate, including the basis reset cost that most calculators ignore. You get a clear net benefit number — not an inflated headline figure.

Related Guides

• Crypto Loss Harvesting — same concept for cryptocurrency, with no wash sale rule
• Tax Loss Harvesting: How It Works — detailed rules, wash sale mechanics, and lot selection
• Capital Gains Tax Strategies — broader approaches to managing gains
• Wash Sale Rule Explained — detailed rules for avoiding disallowed losses
• Direct Indexing — automate harvesting at the individual-stock level
• Asset Location Guide — pair TLH with smart account placement
• DIY Tax Planning for Investors — broader investment tax playbook
• Taxes on Investments — how gains, dividends, and interest are taxed
• Tax Basis Tracking Guide — keep accurate records for cost basis

Sources

• IRS Publication 550 (Investment Income and Expenses)
• IRS Schedule D and Form 8949
• IRS Topic 409 (Capital Gains and Losses)

The information above is educational and not tax advice. You can execute this strategy yourself through your brokerage account by selling losing positions and filing Schedule D and Form 8949 with your tax return.