Realizing losses to offset gains is a well-known tax strategy. Doing it safely when your accounts live at several firms takes a view no single broker has.
Key takeaways
- Harvesting realizes losses to offset gains; up to $3,000 of net loss a year can offset ordinary income, with the rest carried forward.
- The wash-sale rule disallows a loss if you buy a substantially identical security within 30 days before or after, in any of your accounts.
- Each broker only sees its own activity, so cross-broker wash sales are easy to miss.
- Lower cost basis means larger future gains; the benefit is mostly deferral.
- A combined view of every account is what makes harvesting safe.
The basic idea
Tax-loss harvesting means selling an investment that is worth less than you paid for it, so the loss is realized for tax purposes. Realized capital losses offset realized capital gains, which can reduce the tax you owe in a year when you have sold winners.
If your losses exceed your gains, you can use up to $3,000 of net capital loss per year against ordinary income ($1,500 if married filing separately). Anything beyond that carries forward to future years with no expiration for individuals.
Usually the proceeds are reinvested in a similar but not substantially identical holding, so your market exposure stays roughly the same while the loss is captured.
The wash-sale rule
The IRS does not let you sell a security at a loss and immediately buy it back. Under the wash-sale rule, if you buy a substantially identical security within 30 days before or after the sale, the loss is disallowed for now and added to the cost basis of the new shares.
The rule looks across all of your accounts, not just the one where you sold. A purchase in your IRA, your spouse's account, or a different brokerage can trigger a wash sale. Purchases made through dividend reinvestment count too. A wash sale triggered by an IRA purchase is particularly costly, because the basis adjustment does not help you inside the IRA.
Our earlier article, The Wash-Sale Rule, Explained, covers the mechanics in depth.
Illustrative diagram.
Why multiple brokerages make it hard
Each brokerage tracks wash sales only for activity inside its own walls. If you sell a fund at a loss at one firm while a recurring investment plan buys the same fund at another, neither firm will warn you, and the loss may be disallowed without you noticing until tax time.
Gains are scattered too. To know whether a loss is worth realizing, you need your realized gains year to date across every taxable account, plus any carryforward from prior years. That number rarely lives in one place.
And cost basis differs by lot. The same ticker can have lots with gains at one broker and losses at another. Picking the right lots requires a combined view.
The wash-sale rule looks across every account you control, not just the one where you sold.
Doing it thoughtfully
Start with the whole picture: realized gains and losses across accounts, unrealized losses by lot, and any recurring purchases or dividend reinvestments that could collide with a sale.
Choose replacements carefully. A fund tracking a different index in the same asset class is a common approach; what counts as substantially identical is not precisely defined, so many investors err on the conservative side.
Mind the long game. Harvesting lowers your cost basis, which can mean a larger taxable gain when you eventually sell. The benefit comes mostly from deferral and from rate differences, and it depends on your bracket now and later.
Seeing every account at once
A single view across all of your accounts makes unrealized losses and potential wash-sale conflicts easier to spot across brokerages and account types, including IRAs. Write down the planned sale, the replacement and the reason before you place anything.
Review each step yourself. For complex situations, check with a tax professional before acting.
Your checklist
- Total realized gains year to date across taxable accounts
- Pause dividend reinvestment and recurring buys in the same fund
- Check IRAs and a spouse's accounts for purchases
- Pick a replacement that is not substantially identical
- Keep records of lots and dates
Glossary
- Realized loss
- A loss locked in by selling an investment for less than its cost basis.
- Substantially identical
- The IRS standard for a replacement purchase that triggers a wash sale; not precisely defined.
- Carryforward
- Net capital losses beyond the annual limit that roll into future tax years.
Frequently asked questions
How much capital loss can I deduct per year?
Up to $3,000 of net capital loss against ordinary income ($1,500 if married filing separately), with the rest carried forward.
Does the wash-sale rule apply across different brokers?
Yes. It applies to purchases in any account you control, and IRA purchases can trigger it too.
Is tax-loss harvesting always worth it?
Not always. It depends on your gains, bracket and plans. This article is educational, not tax advice.
Educational content, not investment, tax or legal advice.
