Capital Losses, Tax-Loss Harvesting, and Wash Sales
How capital losses offset gains and up to $3,000 a year of other income, how unused losses carry forward, what tax-loss harvesting is and what it really gains you, and how the wash sale rule can disallow a loss.
The short version
Realized capital losses first offset capital gains. If losses are larger, up to $3,000 a year of the excess can reduce your other income, and the rest carries forward to later years until it's used up. Tax-loss harvesting means selling investments at a loss on purpose to use this. But the wash sale rule disallows the loss if you buy the same or a substantially identical investment within 30 days before or after the sale, including in your IRA. A disallowed loss is usually added to the new shares' basis, postponing it. Harvesting mostly defers tax rather than eliminating it.
By the end of this lesson, you'll be able to
- Apply the yearly limit on capital losses and work out a carryover
- Explain what tax-loss harvesting does and doesn't achieve
- Identify a wash sale and its consequences
Why this matters
Losses are part of investing, and the tax rules give them some value: a realized loss can reduce the tax on your gains, and even on some of your other income. Used thoughtfully, that softens the blow. Used carelessly, a rule called the wash sale can take the benefit away.
The rest of this lesson is for members
Still to come in this lesson: How losses are used, Tax-loss harvesting, The wash sale rule, the key takeaways, and 2 quiz questions with explanations.
Membership opens every lesson in the curriculum, the capstone projects, the interactive tools, and the members-only channels in the Hyperion Entities Discord. The first lesson of every module stays free.
Go deeper
- Realized Gains, Unrealized Gains, and Cost BasisPart 6: Strategy, Behavior, Accounts, and Taxes
- Loss Aversion, Anchoring, and Sunk CostsPart 6: Strategy, Behavior, Accounts, and Taxes
- Tax Considerations When SellingPart 6: Strategy, Behavior, Accounts, and Taxes
Notes and sources
- Internal Revenue Service. Topic no. 409, Capital gains and losses. Checked 2026-09-30.
- Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses. Checked 2026-10-11.