Tax Loss Harvesting: How I Cut My Stock Tax Bill

Tax loss harvesting means selling investments that are down so the losses cancel out gains you already took. It is one of the simplest ways I know to legally cut your tax bill. Under IRS rules, capital losses offset capital gains in full, and if your losses are bigger than your gains, you can use up to $3,000 of them against your regular income each year. Anything left over carries forward to future years. Here is how I use it, with a real example from my own account.

What tax loss harvesting is

When you sell a stock for more than you paid, you have a capital gain, and you owe tax on it. When you sell for less than you paid, you have a capital loss. Tax loss harvesting is just being smart about when you take those losses, so they land in the same year as your gains.

The IRS lets capital losses offset capital gains in full. So if I have $50,000 of gains and $50,000 of losses in the same year, my net taxable gain from stocks is zero.

My $90,000 example

A while back I had about $90,000 in short term gains from some of my leveraged plays. Short term means I held them one year or less, and short term gains get taxed at the same rate as your regular income. Let’s say that rate is 30%. That is $27,000 going to taxes if I do nothing.

So I looked at the rest of my portfolio. I had other positions sitting below what I paid for them. I sold those at a loss, and those losses offset my gains. My net taxable gain from stocks dropped to zero. That is $27,000 I kept instead of sending in.

Here is the key part. I did not sit in cash. I took the money from those sales and put it right back to work in something else. All of my money stayed invested. The only thing that changed was my tax bill.

I usually wait until December to take losses. That year I moved early, because I saw the losses available right then and felt they might not be as big later in the year. Timing matters. You harvest losses when they exist, not when the calendar says so.

Why I would rather harvest than hope

Some people say, why not just hold the losers and wait for them to come back? Think about the math. To make back a $27,000 tax bill, the rest of your portfolio has to earn an extra $27,000 just to break even. Harvesting a loss is a sure thing. A rebound is a hope.

If you have no losses at all, congratulations, you made a lot of money. But you will also pay tax on every dollar of it. If you do have losses, use them on purpose.

The $3,000 rule people get wrong

A lot of people think you can only ever use $3,000 of losses. That is not right. The $3,000 limit only applies to losses beyond your gains, the part you use against ordinary income like your paycheck. Against capital gains, losses count in full.

Here is a simple example. Say you have no gains this year and a $10,000 loss. You can use $3,000 against your regular income this year, and the other $7,000 carries forward to future years. If you are married filing separately, the yearly limit is $1,500.

Watch out for the wash sale rule

This is where people trip up. If you sell a stock at a loss and buy the same stock, or something substantially identical, within 30 days before or after the sale, the IRS will not let you deduct that loss. That is a 61 day window. The disallowed loss gets added to the cost basis of the new shares instead, so it is delayed, not erased, but it will not help you this year.

That is why, in my example, I moved the money into something else instead of buying the same shares right back. If you really want the original stock back, wait at least 31 days after the sale.

Short term versus long term gains

It pays to know which kind of gain you are offsetting. If you held an asset more than one year, the gain is long term and gets a lower rate. For 2025, the IRS long term rates are 0%, 15% and 20%, depending on your income. If you held it one year or less, it is short term and taxed at your ordinary rate. Losses against short term gains usually save you the most. Money inside a retirement account works differently, and I break that down in my Traditional IRA vs Roth IRA guide.

Common questions

Is tax loss harvesting legal?

Yes. Offsetting capital gains with capital losses is spelled out in IRS rules. Just follow the wash sale rule.

How much can I deduct with tax loss harvesting?

Losses offset capital gains in full. Beyond that, up to $3,000 a year ($1,500 if married filing separately) can offset ordinary income, and the rest carries forward.

When is the best time to harvest losses?

Many people do it in December, but I harvest when the losses are actually there. Losses can disappear if prices recover, so waiting is not always better.

Can I buy the stock back after selling it for a loss?

Yes, but wait more than 30 days after the sale, or the wash sale rule disallows the loss for now.

Keep reading on Stock Moe

• Traditional IRA vs Roth IRA: Which One Should You Pick?
• How To Invest In The Stock Market The Right Way

Get more from Stock Moe

My free Sunday newsletter goes out every Sunday with the plays I am watching. Sign up for the free Stock Moe Sunday Letter here.

Want live trades, my personal indicator and live teachers? Join the Stock Moe Community.

Sources

• IRS Topic No. 409, Capital Gains and Losses (page reviewed September 24, 2026)
• IRS Publication 550, Investment Income and Expenses, wash sales (for 2025 returns)
• IRS Publication 544, Sales and Other Dispositions of Assets

This article covers United States federal taxes. Talk to your accountant about your own situation, and check your own country’s rules if you live outside the US.

I am not a financial advisor and nothing in this article is financial advice. Everything here is my own opinion, for educational and entertainment purposes only. Do your own research and talk to a licensed professional before you make any financial decision.