Tax-Loss Harvesting Before December 31, 2026: My 3-Step Process

Every December, I go through the same three-step process on my taxable brokerage accounts: figure out where my realized gains and losses stand, decide what to sell to offset them, and recheck the numbers before December 31. It’s one of the simplest, most repeatable tax moves available to any investor with a taxable account.

Tax-loss harvesting (TLH) means selling investments that are down to realize a capital loss — which offsets capital gains elsewhere in your portfolio, and can cut up to $3,000 off your ordinary taxable income if your losses exceed your gains. It’s worth doing every year, not just when the market’s had a rough one.

Step 1: Figure Out Your Realized Gains or Losses to Date

Before deciding what to sell, you need to know where you actually stand. Most brokerages — Fidelity, E*Trade, Schwab, and others — have a tax center or “realized gains/losses” report you can pull any time during the year, broken out by short-term and long-term.

Only taxable brokerage accounts matter here. IRAs and 401(k)s don’t generate capital gains or losses in the tax sense, so skip those entirely.

Separate your short-term and long-term positions when you pull this. Short-term gains are taxed at ordinary income rates — up to 37% — so it’s more valuable to offset those first with short-term losses before touching your long-term positions.

If you own mutual funds, remember they can distribute capital gains to you automatically throughout the year, even if you never sold a share yourself. Check for any capital gain distributions on your statements — they count toward your total.

Step 2: Decide What to Sell

Once you know your starting position, the second step is deciding what to sell before December 31st to harvest losses. My general order of priority:

1. Sell losing positions I don’t expect to recover. These are the easiest calls — if a stock’s underlying business has deteriorated and I don’t see a path back, the loss is worth locking in regardless of tax timing.

2. Sell losing positions I still like long-term. If I believe in the company but it’s down for the year, I sell anyway to harvest the loss, then wait out the 30-day wash-sale window before buying back in (or buy a similar-but-not-identical fund in the meantime to stay invested).

3. Don’t forget crypto, ETFs, and mutual funds. Any of these can generate a harvestable loss too — it’s easy to focus only on individual stocks and miss a fund sitting at a loss.

This process is iterative, not a single afternoon’s work. Give yourself a few weeks in November and December to work through it rather than trying to execute everything on the last trading day of the year — thin holiday trading volume and any last-minute portfolio moves are easier to manage without a deadline crunch.

Example — Marcus has $18,000 in realized long-term gains for the year from selling a stock that had a great run. He also holds an ETF position down $14,000 and a handful of individual stocks down a combined $5,000 that he no longer believes in. By selling all of it, he generates $19,000 in losses — enough to fully offset his $18,000 gain, with $1,000 left over to apply toward the $3,000 ordinary-income deduction.

Step 3: Recheck Your Numbers Before December 31

The final step is simply repeating step 1 — pulling your updated realized gains/losses report to confirm where you landed after your Step 2 sales, and making any last adjustments before the year closes.

If you’re in a high bracket, that extra $3,000 loss against ordinary income is worth more than it looks. At the 37% top bracket, it’s roughly $1,110 in tax savings. Add the 3.8% Net Investment Income Tax if you’re subject to it, and the effective benefit climbs higher for high earners.

Remember that any loss beyond what you can use this year doesn’t disappear — it carries forward indefinitely to future tax years, keeping its short-term or long-term character until it’s fully used up.

The Wash-Sale Rule

The wash-sale rule is the one thing that can quietly undo a tax-loss harvesting move if you’re not careful. You (or your spouse) can’t claim a loss if, within 30 days before or after the sale, you buy the same or a “substantially identical” security — including through an option or contract to buy it.

If the rule applies, the disallowed loss doesn’t just vanish — it gets added to the cost basis of your new shares, effectively deferring the benefit rather than eliminating it outright.

A practical workaround: if you want to stay invested in that asset class during the 30-day window, buy a similar-but-not-identical fund (a different S&P 500 index fund from a different provider, for example) and then move back to your original position after the window closes.

Crypto’s Wash-Sale Loophole — Still Open in 2026

Here’s a genuine asymmetry worth knowing about: the wash-sale rule applies to “stocks and securities,” and the IRS still treats cryptocurrency as property, not a security. As of 2026, no legislation has closed this gap.

That means you can sell a crypto position at a loss and buy it right back immediately — same day, even — and still claim the loss. Congress has considered extending wash-sale treatment to digital assets multiple times (including in the 2021 Build Back Better proposal and subsequent budget proposals), but nothing has passed.

One important wrinkle: this loophole applies to the coins themselves, not spot Bitcoin or Ethereum ETF shares. Since ETF shares are securities, buying back a spot crypto ETF within 30 days of selling at a loss triggers the same wash-sale rule that applies to any stock. If you’re harvesting a crypto loss, know which vehicle you’re actually holding.

With Form 1099-DA reporting now in effect for 2026, your exchange is reporting your transactions directly to the IRS either way — so accurate record-keeping matters more than it used to, loophole or not.

Common Issues to Watch Out For

1. Forgetting mutual fund capital gain distributions. These get taxed as long-term gains regardless of how long you personally held the fund, and they’re easy to overlook since you didn’t actively sell anything.

2. Triggering a wash sale without realizing it. Buying back the same fund in a different account (like your spouse’s IRA) still counts — the rule applies across your combined household accounts, not just the one where you sold.

3. Harvesting losses you don’t actually need. If you have no gains to offset this year, it can still make sense to harvest losses — up to $3,000 applies against ordinary income, and any excess carries forward to offset future gains.

4. Confusing the crypto wash-sale gap with a green light on ETFs. The loophole is real for the coins themselves, but not for spot crypto ETF shares, which are treated as ordinary securities.

5. Waiting until the last week of December. Give yourself time to review and adjust — this is genuinely an iterative process, and rushing it in the final days increases the odds of a mistake.

Looking Ahead: 2027 Outlook

The wash-sale rule’s crypto exemption has been targeted in prior legislative proposals without ever passing, and I wouldn’t count on that changing for 2027 — but it’s worth watching each time a new budget reconciliation bill moves through Congress, since it’s a recurring revenue-raiser lawmakers keep floating.

The $3,000 capital loss deduction against ordinary income is not currently indexed for inflation and has been fixed at that level for decades — a limit that arguably deserves the same scrutiny as the frozen home-sale exclusion. I’ll flag here if that ever changes.

Related reading:

• 2025 and 2026 Updates: Capital Gains Tax Rates — Short and Long Term, Tax Loss Harvesting, and NIIT
• 2026–2027 Year-End Tax Planning: 15 Moves to Make Before December 31
• 2026 Crypto Tax Updates: IRS Form 1099-DA Is Here
• Should You Sell or Hold Your Crypto? A Decision Framework That Doesn’t Depend on the Price