Author credentials
With 15+ years in financial planning and as a CPA and CFP®, I regularly use tax-loss harvesting across tax lots to lower clients’ tax bills while keeping intended market exposure. The guidance below reflects current U.S. tax practice (2025) and is educational, not personalized tax advice.
Why tax lots matter
When you buy the same stock, ETF, or fund at different times and prices, each purchase creates a distinct tax lot with its own cost basis and holding period. Which lot you sell determines whether you realize a short-term or long-term gain or loss, and how large that gain or loss will be. That choice is the core of “harvesting across tax lots.”
Authoritative basics (quick references)
- Capital gains/loss rules and the $3,000 annual ordinary income offset limit (with carryforward) — IRS Topic on Capital Gains and Losses (see IRS guidance) (https://www.irs.gov/taxtopics/tc409).
- Wash-sale rules and how repurchases within 30 days can disallow losses — IRS guidance and Publication 550 (https://www.irs.gov/newsroom/tax-benefit-of-losses-wash-sale-rule) and (https://www.irs.gov/publications/p550).
- Broker reporting of cost basis and Form 1099-B — IRS explanation (https://www.irs.gov/individuals/understanding-your-form-1099-b).
How tax-loss harvesting across tax lots works — step-by-step
1) Inventory and identify lots
- Pull your brokerage cost-basis report. Modern brokerages label lots with acquisition date, cost basis, and holding period. For mutual funds and dividend reinvestment plans, average-cost accounting may be available; for individual securities, “specific identification” is usually the most powerful tool.
2) Determine your objective
- Offset short-term gains first if you expect those to be taxed at higher ordinary-income rates. Use short-term losses to offset short-term gains, and long-term losses to offset long-term gains (they are netted separately) per IRS rules.
3) Select lots strategically
- Specific identification (Spec ID): instruct your broker which lot to sell. This is the highest-precision method to control realized gain/loss and holding period. Make the instruction in writing (or via the brokerage’s trade ticket) before trade execution and keep confirmations.
- FIFO or average-cost: if you don’t specify, brokers often default to FIFO (first-in, first-out) or their own default method; that may not be optimal.
4) Check for wash-sale risk
- Avoid buying the same or a “substantially identical” security within 30 days before or after the sale. The wash-sale rule disallows the loss and adds it to the basis of the replacement shares (IRS guidance).
5) Execute replacement trades (if maintaining exposure)
- Swap into a similar but not substantially identical ETF or fund (e.g., replace a large-cap S&P 500 ETF with a total-market ETF or an ETF tracking a different index) to stay invested without triggering a wash sale.
6) Record and report
- Track the realized loss, confirm how it will show on Form 1099-B, and report appropriately on Schedule D/1040. Brokers now report basis to the IRS for most lots, so confirm the reported lot matches your records.
Practical examples
Simple lot-selection example
- You own 200 shares of XYZ bought in three lots: 50 shares at $100 (Long-term), 100 shares at $120 (Short-term), and 50 shares at $90 (Long-term). Current price: $85.
- Selling the 50 shares bought at $100 realizes a $750 loss (50 × ($85 − $100)). Selling the 100-shares $120 lot realizes a larger loss. If your goal is to maximize short-term loss to offset short-term gains, sell the $120 lot first.
ETF replacement example (avoid wash sale)
- You sell 100 shares of an S&P 500 ETF at a loss. To maintain U.S. large-cap exposure without creating a wash sale, you could buy a total-market ETF or a large-cap mutual fund that is not “substantially identical.” Keep documentation of the differences in index composition.
Common tactical objectives
- Reduce current-year tax liability by offsetting realized gains.
- Create a loss carryforward to use in future higher-income years.
- Improve after-tax expected returns by reducing taxable distributions on future portfolio changes.
Key tax rules and traps to watch
Wash-sale rule specifics
- A loss is disallowed if you (or your spouse or a controlled corporation) buy substantially identical stock or securities within 30 days before or after the sale date. The disallowed loss is added to the basis of the replacement shares, postponing the tax benefit (IRS guidance, Publication 550).
- Reinvested dividends and automatic DRIPs can inadvertently trigger wash sales. Pause DRIP reinvestment or use a different security for replacement.
Short-term vs long-term
- Short-term losses offset short-term gains first; short-term gains are taxed as ordinary income rates, so offsetting short-term gains is usually more valuable than offsetting long-term gains taxed at lower capital-gains rates.
$3,000 ordinary income limit and carryforward
- After netting short-term and long-term gains and losses, if you still have a net loss, up to $3,000 ($1,500 if married filing separately) can offset ordinary income each year; the remainder carries forward indefinitely (see IRS Topic on Capital Gains and Losses).
Recordkeeping and 1099-B reconciliation
- Brokers must report basis for most covered lots to the IRS. Check Form 1099-B for the reported basis and holding period; reconcile any discrepancies before filing to avoid IRS notices (see IRS: Understanding your Form 1099-B).
Practical strategies and advanced tips I use in practice
- Harvest throughout the year: Waiting until late December is common, but opportunistic harvesting during market dips often yields better outcomes and spreads replacement timing to reduce wash-sale risk.
- Prioritize short-term loss realization: Because short-term gains are taxed as ordinary income, harvesting short-term losses produces higher tax value per dollar than long-term losses against long-term gains.
- Use tax-efficient replacement securities: Pick replacement ETFs/funds with different index methodology to avoid the wash-sale rule while preserving exposure.
- Watch transaction costs and tracking error: Net tax savings must exceed trading costs and potential drift from your target allocation.
- Coordinate with Roth conversions and planned income events: If you expect a low-income year (e.g., early retirement, job change), it can make sense to defer harvesting until you can realize gains at lower rates or use losses more effectively.
- For mutual funds with average-cost basis: average-cost can simplify tracking, but it reduces precision for lot selection. If you need precision, consider holding individual securities or using specific identification when possible.
Technology and automation
- Many brokerages and robo-advisors offer automated tax-loss harvesting. These systems are useful for constant monitoring but can be limited by the need to manage wash-sale windows and replacement asset selection.
- Manual oversight is often advantageous for complex taxable portfolios (concentrated positions, multiple accounts, or active trading strategies).
When to involve a professional
- Complex portfolios with concentrated positions, significant short-term gains, or frequent trading benefit from a CPA or tax-aware financial planner’s help. In my experience, clients with $100k+ in taxable gains or concentrated stock positions get the most value from professional coordination.
Internal reading and next steps
For more on timing and year-round harvesting tactics, see our guide Using Tax-Loss Harvesting Beyond Year-End (https://finhelp.io/glossary/using-tax-loss-harvesting-beyond-year-end/). To compare harvesting with other tactical strategies, read Capital Gains Harvesting vs. Tax-Loss Harvesting (https://finhelp.io/glossary/capital-gains-harvesting-vs-tax-loss-harvesting/). Learn how to integrate lot selection into rebalancing with Using Tax-Efficient Lots When Rebalancing Taxable Accounts (https://finhelp.io/glossary/investment-and-asset-allocation-using-tax-efficient-lots-when-rebalancing-taxable-accounts/).
Common mistakes to avoid
- Failing to specify lots (allowing FIFO) and losing control of tax outcomes.
- Triggering wash sales through DRIPs, automatic rebalancing, or buying similar funds.
- Ignoring trading costs or bid-ask spreads that can erase tax benefits.
- Forgetting to reconcile broker 1099-B reports with your records.
FAQ (brief)
Q: Can losses be used against ordinary income? — After netting gains and losses, up to $3,000 per year can offset ordinary income; the balance carries forward (IRS guidance).
Q: Are ETFs safer for harvesting than individual stocks? — ETFs can be convenient, but the same rules apply. For replacements, choose funds that aren’t substantially identical to avoid wash-sale issues.
Professional disclaimer
This article is educational and reflects general U.S. federal tax rules as of 2025. It is not personalized tax or investment advice. For decisions that affect your tax return or investment plan, consult a CPA or tax advisor.
Selected authoritative sources
- IRS — Capital Gains and Losses (Topic 409) and related guidance (https://www.irs.gov/taxtopics/tc409).
- IRS — Wash Sales and Publication 550 (https://www.irs.gov/newsroom/tax-benefit-of-losses-wash-sale-rule), (https://www.irs.gov/publications/p550).
- IRS — Understanding Your Form 1099-B (https://www.irs.gov/individuals/understanding-your-form-1099-b).
- Consumer Financial Protection Bureau — Basic investing guidance and fees (https://www.consumerfinance.gov/consumer-tools/investing/).
If you’d like, I can provide a one-page checklist you can use with your broker to implement specific-identification sales and replacement trades.
