Tax-loss harvesting offers a straightforward way to reduce your 2026 tax bill by strategically selling losing investments. Here's how it works.
When you sell a security at a loss, you can use that loss to offset capital gains from other investments. If your losses exceed your gains, you can deduct up to $3,000 of the excess against ordinary income. Any remaining losses carry forward to future years indefinitely, giving you continued tax breaks down the line.
The math is simple. Suppose you sold shares of Stock A for a $5,000 gain this year but own Stock B that has dropped $8,000 below your purchase price. Selling Stock B creates an $8,000 loss. This loss wipes out the $5,000 gain entirely, and the remaining $3,000 loss reduces your taxable ordinary income. That $3,000 deduction could save you $600 to $1,200 in federal taxes, depending on your tax bracket.
The strategy gains power in down markets. If 2026 brings stock volatility or declines, investors with underwater positions should review their portfolios now. Identify holdings trading below cost basis and assess whether keeping them makes sense long-term. If not, harvest the loss before year-end.
One critical rule: the wash-sale rule. The IRS prohibits buying the same security or a substantially identical one within 30 days before or after a loss sale. If you do, the loss becomes disallowed and adds to your cost basis instead. You can sidestep this by purchasing a similar (but not identical) fund. Sold a losing S&P 500 index fund? Buy a different S&P 500 fund from another provider temporarily, then switch back after 31 days.
Tax-loss harvesting works best for taxable accounts. Losses