Overview
Tax-loss harvesting means deliberately selling an investment at a loss to offset capital gains elsewhere in your portfolio, reducing your current-year tax bill. It's usually discussed as an accumulation-phase strategy, but it remains genuinely useful in retirement — just with a few different considerations.
Why It Matters
In retirement, you're likely realizing capital gains anyway — rebalancing a portfolio, funding a large purchase, or executing a withdrawal strategy from taxable accounts. Harvesting losses in the same year offsets those gains dollar-for-dollar, and any excess loss (up to $3,000/year) can offset ordinary income too, with the remainder carrying forward indefinitely.
How It Works
- Sell a position trading below your purchase price, realizing a capital loss.
- Use that loss to offset realized capital gains elsewhere in your portfolio dollar-for-dollar; short-term losses offset short-term gains first, long-term offsets long-term first, with any excess crossing over.
- Up to $3,000 of net losses beyond that ($1,500 if married filing separately) can offset ordinary income each year; unused losses carry forward indefinitely.
- Avoid the wash sale rule: you cannot buy the same or a "substantially identical" security within 30 days before or after the sale, or the loss is disallowed. Common workaround: buy a similar but not identical fund (e.g., a different S&P 500 index fund from a different provider) to maintain market exposure during the 30-day window.
2026 Key Numbers
- Long-term capital gains rates: 0%, 15%, 20% depending on taxable income; the 0% bracket runs up to roughly $48,350 single / $96,700 joint (2025 figures, modestly higher for 2026).
- Short-term gains (assets held under a year) are taxed as ordinary income at rates up to 37%, making short-term losses particularly valuable to harvest against them.
- Annual ordinary-income offset limit remains $3,000 ($1,500 MFS), unchanged for years.
Common Mistakes
- Triggering a wash sale by repurchasing the same fund too soon, disallowing the loss
- Harvesting losses without considering the effect on IRMAA or the taxability of Social Security — a large offsetting gain elsewhere in the same year can still raise MAGI even after harvesting
- Ignoring state tax treatment, which doesn't always mirror federal capital loss rules
- Forgetting that losses in tax-advantaged accounts (IRA, 401k) can't be harvested — this strategy only applies to taxable brokerage accounts
Sources
- IRS Publication 550 — Investment Income and Expenses (wash sale rules)
- Charles Schwab — capital gains rate guidance for 2025–2026
This is general education, not personalized advice. Coordinate loss harvesting with your overall withdrawal strategy and MAGI-sensitive thresholds (IRMAA, Social Security taxation) with a financial planner.