Tax-Loss Harvesting in Practice: When to Sell, When to Hold

When should you sell for tax-loss harvesting, and when should you hold?

Tax-loss harvesting (TLH) is a practical tax-management tool, not a market-timing strategy. In plain terms: sell a losing position when the tax savings and portfolio benefits exceed the costs (trading fees, bid/ask spreads, tracking risk and potential loss of future upside). Hold when the loss is likely to reverse or when realizing the loss would meaningfully damage your long-term investment plan.

Below I lay out a step-by-step framework I use with clients, real-world examples, common pitfalls and the key IRS rules you must follow. I’ve used TLH for more than 15 years as part of year-round tax planning; the guidance here mixes IRS rules with practical decision-making.

How the tax mechanics work (short primer)

• Realized losses offset realized capital gains of the same tax year. Short-term losses offset short-term gains first, then long-term (and vice versa) — netting rules matter when you have both types. (See IRS Topic No. 409: Capital Gains and Losses: https://www.irs.gov/taxtopics/tc409)
• If losses exceed gains, you can deduct up to $3,000 ($1,500 if married filing separately) of net capital losses against ordinary income in a given year; unused losses carry forward indefinitely to future years. (IRS Topic No. 409)
• You report sales on Form 8949 and Schedule D when you file federal taxes (Form 8949: https://www.irs.gov/forms-pubs/about-form-8949; see Publication 550 for investment rules: https://www.irs.gov/forms-pubs/about-publication-550).

Five practical rules I use with clients

1. Tie TLH to investment rationale, not greed. Only harvest losses when doing so keeps your target asset allocation and long-term plan intact. If selling a loser creates concentration or removes a position you believe will recover for strategic reasons, hold instead.

2. Prioritize tax lots. Sell specific lots with the highest basis or those that create the most favorable tax outcome. When you have multiple purchase lots, choose the lots that minimize short-term gains and maximize long-term tax benefits.

3. Mind the wash-sale rule. The IRS disallows a loss if you buy the same or a “substantially identical” security within 30 days before or after the sale. This rule applies across taxable accounts and IRAs. See our deeper guide on the Wash-Sale Rule and IRS guidance in Publication 550.

4. Use similar-but-not-substantially-identical replacements. To keep market exposure while avoiding a wash sale, switch into a different ETF or mutual fund with similar exposure (for example, an S&P 500 fund from a different issuer or a total-market fund instead of a single large-cap ETF). Be careful with funds that track the same index and might still meet the IRS standard for “substantially identical.”

5. Evaluate transaction costs and drag on returns. Commission-free trading is common now, but wide spreads, bid/ask slippage and taxable rebalancing costs still matter. Don’t harvest tiny positions where costs exceed the tax value.

When to sell: clear signals that harvesting makes sense

• You have realized gains this year you want to offset. If you sold appreciated stock or had a capital event, matching losses reduces tax this year.
• The losing position no longer fits your thesis or allocation. If the fundamentals changed or it increases concentration risk, sell and harvest the loss.
• You face a high ordinary tax rate this year. Harvesting offsets gains or up to $3,000 of ordinary income, which is most valuable when marginal rates are high.
• You can replace exposure cheaply without triggering a wash sale (see above). If a low-cost substitute exists, harvest and stay invested.

Example: You realized a $10,000 long-term gain earlier in the year. Selling $10,000 of realized losses would offset that gain dollar-for-dollar and save you the tax on that $10,000 (the tax saved equals the after-tax reduction depending on your long-term capital gains rate). If the replacement investment preserves your targeted market exposure, the economics typically favor harvesting.

When to hold: cases where TLH is not the right move

• The position is temporarily down but your investment conviction is strong. Selling solely for a tax loss can be self-defeating if the security rebounds quickly.
• The loss is small and transaction costs will eat the tax benefit.
• You lack alternative exposure that avoids the wash-sale rule or you’d create a materially different risk profile by replacing the holding.
• You anticipate a low-tax year ahead or plan to harvest gains at a favorable future tax rate. Sometimes deferring a harvest to a year with a lower marginal rate or where you have capital losses to offset is better.

Strategic timing: year-end and year-round approaches

Many investors and advisers focus TLH near year-end because it helps lock in tax outcomes for that tax year. That’s useful when gains have already been realized. But I recommend a year-round workflow that monitors tax lots and opportunistically harvests when losses appear. Our Year-Round Tax-Loss Harvesting: A Practical Workflow guide covers a systematic approach to scanning lots, rebalancing and documenting trades.

Year-end checklist for TLH:

• Reconcile realized gains and losses year-to-date.
• Flag lots with losses that won’t disrupt allocation if sold.
• Confirm replacement investments won’t trigger a wash sale.
• Document trades and hold records for Form 8949.

Advanced considerations

• Short-term vs. long-term loss timing: Short-term losses (from assets held ≤1 year) offset short-term gains first, which are taxed at ordinary rates. If you have short-term gains, harvesting short-term losses can be especially valuable.
• Carryforward math: Unused net capital losses carry forward indefinitely. That makes TLH a multiyear planning tool — large losses can shelter future gains over many years.
• Retirement accounts and wash-sales: Be cautious—purchases in IRAs and Roth IRAs can cause disallowed losses if they occur within the 30-day wash-sale window of the taxable sale. Publication 550 discusses cross-account wash-sale effects (IRS Publication 550: https://www.irs.gov/forms-pubs/about-publication-550).
• Large concentrated positions: When a client has concentrated stock, I sometimes use staged selling, collars, or hedging to manage risk while harvesting losses in other parts of the portfolio. That interplay between risk management and tax efficiency requires planning beyond one-off TLH trades.

Common mistakes and how to avoid them

• Ignoring the wash-sale across accounts. Solution: keep a 31-day window or use a clearly different ETF/fund and document your intent and the reasoning.
• Harvesting and immediately buying the same fund on autopilot. Solution: set rules in your brokerage to avoid automatic reinvestment (e.g., DRIPs) that could create a wash sale.
• Over-harvesting and derailing your asset allocation. Solution: always rebalance, and if you harvest, replace the exposure intentionally with similar, but not identical, holdings.

Example math (simple)

Assume you realized $8,000 of long-term capital gains and are subject to a 15% long-term gains rate. Harvesting $8,000 of losses offsets the gains and saves roughly $1,200 in federal tax (ignoring state taxes). If the replacement costs (spread, trading cost, tracking error) are less than $1,200 and the replacement fits your plan, harvest.

If you have no gains and you harvest $5,000 of losses, you can deduct $3,000 against ordinary income this year and carry $2,000 forward. If your marginal ordinary tax rate is 24%, the immediate benefit is about $720, plus future value from the carryforward.

Recordkeeping and reporting

• Keep trade confirmations and notes about replacement securities and rationale. You’ll need accurate cost basis and dates for Form 8949 and Schedule D (Form 1040).
• Many brokerages provide tax reports that aggregate lots and highlight potential wash sales, but confirm accuracy—errors happen.

Tools and software

Tax-aware custodians, automated TLH services and portfolio software can simplify harvesting at scale. If you manage multi-account households, software is especially helpful in avoiding cross-account wash-sales and optimizing lot selection.

Internal resources and further reading

• For the technical rules on repurchases and timing, see our glossary entry on the Wash-Sale Rule.
• If you want a step-by-step operational plan, read Year-Round Tax-Loss Harvesting: A Practical Workflow.
• For broader TLH strategies and when to consider harvesting vs. holding, our main Tax-Loss Harvesting overview is a good companion piece.

Professional disclaimer: This article is educational and does not constitute tax or investment advice. Rules change and each investor’s circumstances are different. Consult a qualified tax adviser or CPA about how TLH fits your tax profile and investment plan. I also recommend reviewing IRS guidance directly (IRS Topic No. 409 and Publication 550) when preparing tax filings.

Sources and authoritative references:

• IRS Topic No. 409, Capital Gains and Losses: https://www.irs.gov/taxtopics/tc409
• Form 8949, Sales and Other Dispositions of Capital Assets: https://www.irs.gov/forms-pubs/about-form-8949
• IRS Publication 550, Investment Income and Expenses (covers wash-sale rules): https://www.irs.gov/forms-pubs/about-publication-550

If you want, I can convert this into a quick, actionable year-end TLH checklist or a worksheet to run the numbers for specific gain/loss scenarios.