Tax Loss Harvesting: What It Is and How It Works

By Kristi Waterworth – Updated Aug 12, 2025 at 1:53 PM EST | Fact-checked by Frank Bass

Key Points

Tax loss harvesting reduces taxable income by offsetting capital gains with losses from sold investments.
Investors must adhere to IRS wash sale rules, avoiding buying similar assets 30 days before and after the sale.
You can offset up to $3,000 of income annually with harvested losses, carrying forward any excess.
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Tax loss harvesting is a strategy for reducing your taxable income by selling investments that have dropped in value to offset some of your capital gains. You then put the money from the investment you sold into an asset that fits a similar role in your portfolio. Tax loss harvesting can be an effective way to lower your tax bill, but it has some major limitations.

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Wash sale rules

If you're planning to use tax loss harvesting, you'll need to adhere to the IRS wash sale rules. Essentially, you're prohibited from buying "substantially identical" shares of the same security 30 days before and 30 days after (61 days total, counting the day of the sale) selling the stock if you're taking the loss for tax purposes.

In other words, if you sold stock at a loss, you can't buy shares of the same company two weeks later and then declare the loss on your tax return. Wash sale rules prohibit your spouse from buying an identical stock within the 61-day window, too.

The rules for what constitutes a "substantially identical" security can get a bit murky. Check with a tax professional to ensure you comply with the rules.

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About the Author

Kristi Waterworth has been a contributing real estate and financial expert at The Motley Fool, covering real estate, investing, and personal finance topics, since 2020. Kristi has been interviewed by various TV media outlets and podcasts for her real estate investing expertise – from residential real estate to digital real estate and everything in between. Kristi’s journalist career spans over 25 years, and she has written about real estate investing, homeownership, and home construction specifically for the last decade. She was also previously a licensed Realtor and general building contractor before the Great Recession and housing market collapse. She holds a bachelor’s degree in American history from Columbia College in Missouri.

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