Tax-Loss Harvesting: Turn Losing Stocks Into Tax Savings
June 10, 2026 · 11 min read · Tax Strategy
Every market pullback is also a tax opportunity. Tax-loss harvesting lets you sell declining positions to realise losses that offset capital gains — often saving thousands in taxes — while staying fully invested in equivalent positions. Here's the complete playbook.
How tax-loss harvesting works — a concrete example
You bought 100 shares of a tech stock for $10,000 in January. By September it's worth $7,500 — a $2,500 unrealised loss. Separately, you sold another stock earlier in the year for a $3,000 gain.
Without TLH: You owe capital gains tax on the full $3,000 gain — roughly $450 at the 15% long-term rate, or $714 at the 23.8% rate (20% + 3.8% NIIT) for high earners.
With TLH: You sell the declining tech stock, realising the $2,500 loss. This offsets $2,500 of your $3,000 gain, leaving only $500 taxable. Tax owed drops from $450–$714 to $75–$119. You immediately buy a similar (but not substantially identical) tech ETF to maintain your market exposure. Net result: you're still fully invested in tech, but you've deferred $375–$595 in taxes.
The key insight: deferral is compounding
TLH doesn't eliminate taxes — it defers them. But deferred taxes are valuable because those dollars stay invested. Every $1,000 in deferred taxes that stays invested at 8% for 20 years becomes $4,661. The sooner you defer, the longer that money compounds for you instead of for the IRS.
2026 capital gains tax rates — who benefits most from TLH
Filing Status
Taxable Income
Long-Term Cap Gains Rate
NIIT Applies?
Effective Rate
Saving per $10K harvested
Single
Under $47,025
0%
No
0%
$0 (but carry forward)
Single
$47,025 – $518,900
15%
No
15%
$1,500
Single
Over $518,900
20%
Yes (3.8%)
23.8%
$2,380
MFJ
Under $94,050
0%
No
0%
$0 (but carry forward)
MFJ
$94,050 – $583,750
15%
No
15%
$1,500
MFJ
Over $583,750
20%
Yes (3.8%)
23.8%
$2,380
NIIT = Net Investment Income Tax (3.8%) applies to investment income for single filers above $200K and MFJ above $250K MAGI. Note short-term capital gains (assets held less than 1 year) are taxed at ordinary income rates — potentially 32%–37% for high earners — making TLH even more valuable for short-term positions.
Step-by-step TLH execution guide
1. Identify positions with unrealised losses
Review your taxable brokerage account (not IRA or 401k — TLH only applies to taxable accounts). Sort by unrealised gain/loss. Focus on positions down 10%+ from cost basis. Short-term losses (held < 1 year) are more valuable because they offset short-term gains first, which are taxed at higher ordinary income rates.
2. Verify no planned dividends or corporate actions imminent
Selling just before an ex-dividend date means you'd miss the dividend. Check the ex-dividend date for any position you're considering selling — if it's within 10 days, delay the sale until after you've captured the dividend (or buy back afterward).
3. Identify a replacement security before selling
Choose a replacement that maintains your desired market exposure but is NOT substantially identical to what you sold. Good ETF swaps: VOO ↔ IVV ↔ SPY for large-cap US; VXF ↔ SCHA for small-cap; IEFA ↔ VEA for international developed. For individual stocks, a sector ETF is the easiest replacement (selling NVDA → buying SMH semiconductor ETF).
4. Execute the sale and immediate replacement purchase
Sell the losing position and immediately buy the replacement in the same transaction window. Don't wait — market movements in the 31-day gap can be significant. The goal is to maintain market exposure while locking in the loss for tax purposes.
5. Set a calendar reminder to re-evaluate at day 31
After 31 days have passed (day 32 to be safe), you can sell the replacement and rebuy the original position if desired. Or simply keep the replacement if it's a low-cost index ETF — there's no obligation to return to the original holding.
6. Document everything and reconcile with Form 1099-B
Your broker will issue a Form 1099-B at year-end showing all sales and whether they're wash sales. Review it carefully. If you use multiple brokers, cross-account wash sales can be triggered — the IRS looks at all accounts held by you and your spouse combined.
Common wash-sale-safe ETF swap pairs
These pairs track similar (but not substantially identical) indexes, allowing you to maintain equivalent exposure during the 31-day wash-sale window.
Exposure
Sell
Buy replacement
Notes
US Large Cap
VOO (Vanguard S&P 500)
IVV (iShares S&P 500)
Both track S&P 500 but are considered different securities
US Total Market
VTI (Vanguard Total)
ITOT (iShares Total)
Track slightly different indexes (CRSP vs. S&P Composite)
US Small Cap
VB (Vanguard Small)
SCHA (Schwab Small)
Different underlying indexes
International Developed
VEA (Vanguard Intl)
IEFA (iShares Intl)
Both cover developed markets ex-US
Emerging Markets
VWO (Vanguard EM)
IEMG (iShares EM)
Different index provider; similar exposure
Tech sector
QQQ (Nasdaq-100)
QQQM or VGT
Verify current compositions before swapping
The "substantially identical" determination is a facts-and-circumstances test that IRS has never fully codified for ETFs. The swaps above are widely used in the industry but are not guaranteed safe. Consult a tax professional for large positions.
Disclaimer: This article is for educational purposes only and does not constitute tax advice. Tax rules change and individual circumstances vary widely — consult a qualified CPA or tax advisor before executing any tax-loss harvesting strategy.