Tax-Loss Harvesting: What a $6,000 Loss Can Actually Save You

What tax-loss harvesting can do

0:00 Tax loss harvesting lets you use a losing investment to wipe out your capital gains and knock up to $3,000 off your regular income. But for 2026, you have to sell by Thursday, December 31st. But buy it back too soon or let your IRA buy it for you and the IRS can make that loss disappear for good. So if you've got a red position in your account, there's real money on the table. And if you think that this is just some gimmick that pushes your taxes down the road, stick around.

0:24 You're partly right and I'll show you exactly where. Here is a made-up example.

Wojak's $6,000 loss

0:28 Wojak put $15,000 into a stock that's now worth $9,000. So he's down $6,000. He's a certified bag holder. But right now that loss only exists on his screen. My name is Blake. I'm a CPA who for some reason has fun explaining investing in plain English. So you don't end up learning the expensive way like Wojak. And today on 9to5investing, we're talking about turning this year's losses into a tax break before the year ends without falling into the wash-sale trap.

0:53 The moment he sells, it becomes a real loss he can actually use on his tax return.

Offset gains, then ordinary income

0:57 And it goes up against any gains he's already taken this year first. Say he sold a different stock back in March for a four grand profit. The six grand loss cancels that whole gain. So he owes nothing on it. And he still has two grand of loss left over. That leftover two grand comes off his regular income, his paycheck, his side hustle, whatever. That's the part a lot of people don't realize they can do. There's actually no cap on how much gain your losses can cancel.

1:27 The cap is on what spills over onto your regular income. And it's $3,000 a year or $1,500 if you're married filing separately, which just as a side note, married filing separately will really screw you on basically every tax provision. I had to do it for a couple of years because of student loans and it sucked. Funny thing is that limit was set back in 1978 and Congress has never adjusted it for inflation.

Carryovers and deduction math

1:48 So what if your loss is bigger than that? Nothing's wasted. The rest carries forward to next year and the year after that for as long as it takes. Technically for as long as you're alive. Say Wojak's loss had been 11 grand instead. With that same four grand gain, he'd cancel the gain, take the full deduction against his income this year and carry the other four grand into 2027. But a deduction is not a refund check. A deduction just lowers the income you pay tax on.

2:19 So Wojak's in the 22% federal bracket. The two grand that comes off his regular income saves him $440 before any state tax. So harvesting the loss is the easy part.

The wash-sale window

2:29 The hard part is what you do after you sell because that's where people trip the wash sale rule. If you sell at a loss and buy the same or substantially identical stock or fund, within 30 days before or after the sale, the loss is disallowed for now. That's the wash sale rule. So there's a 30-day waiting period before or after — not just after — before or after you sell that stock and buy what's called a substantially identical security later on.

2:55 But the quote "for now" matters. The disallowed loss gets added to the cost of the new shares. So you get it back when you finally sell those. Here's what catches people though. The window runs in both directions. So if you buy more shares in early December to average down and then sell your original shares at a loss that can trigger it too. Say Wojak sells on New Year's Eve. His danger window started December 1st and it runs until the end of January.

3:18 So the first trading day he can buy it back is on Monday, February 1st. So naturally Wojak sells waits four days panics that he's missing the rebound and buys it right back loss on hold. But that's the obvious version.

Automatic buys and other accounts

3:31 The traps that actually catch people are the ones they never see coming. Trap number one is automatic buying. If you've got dividend reinvestment turned on or a recurring buy setup for that same investment that purchase counts even if you never touched a button. Zoomer has four brokerage apps. So he figures he'll sell in one app and buy back in another. That doesn't work either. The rule follows you not your account. Even worse your broker probably won't warn you.

3:55 Here's how Schwab puts it IRS regulations require only that Schwab track and report wash sales on the same CUSIP number within the same account. A CUSIP is just the ID number for a security, for those that don't know. So if the buyback happens in a different account catching that is on you.

Spouse and IRA traps

4:09 Trap number two is your spouse. Chad sells his losing shares and the next day, Tradwife buys the same stock in her account because she thinks it's on sale. IRS publication 550 says that's still a wash sale to the IRS. A married couple is basically one investor with two phones. Trap number three is the nasty one. Your IRA. Say Wojak sells at a loss in his regular brokerage account, then buys the same stock in his Roth IRA a week later. In 2008 the IRS ruled that that is a wash sale and that the loss doesn't get added to the cost of the IRA shares.

4:40 So that loss isn't delayed. It's just gone. What about your spouse's IRA? As far as I can find the IRS hasn't ruled on that exact combo. But with the spouse rule and the IRA rule both on the books. I personally wouldn't risk it. In fact, I definitely wouldn't risk it as a CPA. I would treat it as off limits. Never mind.

When a different fund is too similar

5:07 Trap number four is thinking that a different ticker means a different investment. Selling an S&P 500 index fund and buying another company's S&P 500 fund is the classic move. And the IRS has never given a clear answer on whether those count as substantially identical. Generally one company stock isn't substantially identical to a different company stock. Two funds tracking the exact same index is the gray area. So a lot of investors swap into something similar but not a twin like a total stock market fund.

5:31 And even that is a judgment call not an IRS approved answer.

Trade date versus settlement

5:34 So last piece is timing and there's a question that trips people up every December. Does the sale have to settle by New Year's Eve? No. For stocks and ETFs sold on an exchange the tax year follows the trade date not the settlement date. Trades settle one business day later now, and New Year's Day is a market holiday. So sale on Thursday December 31st won't settle until Monday January 4th. It still counts as a 2026 loss. Just don't wait for the last closing bell of the year.

5:59 If your order doesn't fill or your app freezes, there's no do-over. So give yourself a few days of cushion.

Deferral and the tax-tail problem

6:04 But here's the strongest argument against all of this because it's a fair one. When you sell it a loss and buy something similar your new cost is lower. So you'll probably owe more tax when you sell it later. So a lot of the time you're not erasing tax, You're pushing it down the road. But pushing it down the road can still pay. The deduction might save you 22% now while the gain later could be taxed at a lower long-term rate like 15% or even 0% in a low income year.

6:29 The real risk is letting the tax tail wag the dog. If you sell something you believe in, sit in cash for a month and it jumps 20% while you wait, you paid a lot for a $440 tax break.

The year-end checklist

6:39 So here's how I would handle it. Start with what you've already sold this year because gains you've already locked in are where losses do the most work. And the documentation on specific identification, which shares are actually being sold, you may not find on some of your year-end statement. That's your own personal recordkeeping. Then sell the loser before the last closing bell of the year. And if you want to stay invested, buy something similar, not identical.

7:05 Before you sell, turn off dividend reinvestment and recurring buys on that investment in every account, including your IRA and your spouse's account. If it's a big number or your situation is messy, run it past the tax professional before you click sell, not after. Tell me in the comments. Don't be ashamed, by the way, if you're harvesting any losses here. YouTube picked this next video for you and it's not substantially identical to this one.