Tax-Loss Harvesting and the Wash-Sale Rule (Section 1091)

How it works

Selling a security that trades below its cost basis realizes a capital loss. What that loss is worth depends entirely on where it lands, and the landing order is fixed by statute rather than chosen by the taxpayer.

Section 1222 nets first within character. Short-term losses go against short-term gains, long-term losses against long-term gains, and whatever survives on each side then nets against the other. If a net loss remains, Section 1211(b) lets a non-corporate taxpayer deduct it against ordinary income, capped at $3,000 for the year, or $1,500 for a married taxpayer filing separately. Anything still unused carries forward under Section 1212(b) with no expiration, and it keeps its short-term or long-term character on the way, under 1212(b)(1). There is no carryback for an individual. The carryback in 1212(a) is a corporate rule.

Why this is mostly a deferral

The loss is real, but reinvesting the proceeds resets basis lower, so the same dollars usually reappear later as a larger gain. Harvesting moves a deduction forward in time more than it eliminates tax, and that is the part worth being blunt about.

The rate pickup runs in one direction only. A long-term loss that lands against a short-term gain, or against ordinary income under the $3,000 rule, converts a deduction that would have been worth the long-term capital gains rate into one worth the ordinary rate, and the ordinary rate is the higher of the two. That spread, not the loss itself, is where the benefit lives. The two other exits from pure deferral are a sale in a year when the long-term rate is zero, and holding the asset until death, when Section 1014 steps basis up and the deferred gain never comes due.

What this is worth in Florida

Nothing at the state level, and I would rather say so plainly. Florida has no individual income tax and does not tax pass-through income at the personal level, so a capital loss has no Florida value to harvest in the first place. The entire benefit is federal, which means the decision is driven by federal brackets and by the 3.8% net investment income tax in Section 1411, never by a state offset.

Who this applies to

The eligibility question here is unusually simple. Almost everything difficult about this sits in the wash-sale rule rather than in who is allowed to use it.

• Any non-corporate taxpayer with a taxable brokerage account. There is no income ceiling and no AGI phase-out. The $3,000 ordinary-income offset in Section 1211(b) and the indefinite carryforward in Section 1212(b) apply to individuals across the board.
• Corporations, but on different terms. A corporation deducts capital losses only against capital gains under Section 1211(a), with no ordinary-income offset at all, and its excess carries back three years and forward five under 1212(a)(1). For an S corporation or an LLC this is a flow-through item that lands on the individual return, so the individual rules are the ones that govern.
• Only a capital asset held in a taxable account. A loss inside an IRA, a Roth, or a 401(k) is never deductible, because there is no realization event for tax purposes. Worse than that, a purchase inside one of those accounts can destroy a loss harvested in the taxable account, which is the failure mode further down this page.

Where cryptocurrency sits right now

Section 1091 is written to reach stock or securities, and as of 2026 that language does not reach cryptocurrency. A crypto position sold at a loss and repurchased immediately is currently outside the wash-sale rule. The One Big Beautiful Bill Act, enacted July 4, 2025, did not extend Section 1091 to digital assets; earlier draft versions that would have were dropped. I flag this rather than build around it, because it is a known legislative target and could change.

What it requires

These conditions hold at once or the harvest does not hold. The deadlines below are part of the mechanism, not a checklist: each one attaches to a specific event, and the event is what makes the deadline bite.

• A taxable account holding a security below its basis. Nothing is realized until the position is actually sold, so an unrealized loss is not a deduction no matter how large it grows.
• A clear 61-day wash-sale window. Section 1091(a) disallows the loss if substantially identical stock or securities are bought within 30 days before or 30 days after the sale. The window runs in both directions from the sale date, and the backward half is the one that produces accidental wash sales: a purchase 25 days before the sale triggers it exactly as a purchase 25 days after does.
• A substitute that is not substantially identical. Section 1091 turns on substantially identical stock or securities, which is a facts-and-circumstances comparison rather than a match of CUSIP numbers. A fund from a different sponsor that tracks the same benchmark is the classic risky call; a fund tracking a different index is the easier one to defend, and where the call is close the difference in index or holdings has to be documented.
• Every account in view, including a spouse's. The rule looks across all of the taxpayer's taxable accounts and the spouse's, and, critically, at both of their IRAs and Roth IRAs.
• Lot identification made by the settlement date. Treas. Reg. 1.1012-1(c) permits specific identification of which lots are sold, which is what makes it possible to reach the highest-basis lots. Adequate identification means telling the broker which lots at or before the trade and receiving written confirmation within a reasonable time, under (c)(1) and (c)(3); a standing instruction the broker acknowledges also qualifies. Paragraph (c)(8) requires the identification by the settlement date. Absent it, FIFO is the default, and FIFO usually surfaces the lowest-basis lots first.

This figure does not move. The $3,000 ordinary-income cap, $1,500 for a married taxpayer filing separately, is statutory and is not indexed for inflation. It has not changed since 1978, the 2025 tax law left it alone, and it is $3,000 for both 2025 and 2026.

What you need to document

The file here is short, but the first piece of it cannot be created after the fact, which is what makes this worth setting up before a sale rather than at filing time.

The lot identification and the broker's confirmation

Which lots were sold, fixed at the trade, with written confirmation from the broker within a reasonable time, or a standing instruction the broker has acknowledged. Treas. Reg. 1.1012-1(c)(1) and (c)(3). This is the piece with a hard deadline attached: under (c)(8) the identification has to be made by the settlement date.

The rationale for the substitute security

What was sold, what was bought in its place, and how the two differ. If the not-substantially-identical call is ever questioned, this is the file that answers it.

A 61-day view across every account

Covering the taxpayer's accounts, the spouse's accounts, and both of their IRAs and Roth IRAs, and including automatic dividend reinvestment, which is easy to miss precisely because nobody places the order.

The reporting itself

Every disposition goes on Form 8949, and where a wash sale applies that means code W in column (f) with the disallowed amount in column (g). Totals carry to Schedule D. A carryforward is tracked from year to year on the Capital Loss Carryover Worksheet in the Schedule D instructions.

Where it goes wrong

Standard loss harvesting is not a listed or reportable transaction. It carries no Form 8886 or disclosure obligation, and it is mainstream planning rather than an aggressive position. The meaningful exposure is narrow: a botched wash-sale call, or a botched basis identification.

The IRA wash sale, which destroys the loss instead of deferring it

In an ordinary wash sale the disallowed loss is not gone. Section 1091(d) adds it to the basis of the replacement security, so the deduction is postponed until that replacement is sold. The loss survives inside the basis, and the cost is timing.

Now change one fact. The taxpayer, or the spouse, sells at a loss in a taxable account, and an IRA or Roth IRA buys substantially identical securities inside the 61-day window. Rev. Rul. 2008-5 holds that the loss is disallowed under Section 1091 and that the IRA's basis is not increased by the disallowed amount. There is no account left that can absorb it. The deduction is not deferred, it is destroyed, and this is the one failure on this page that is permanent rather than a matter of timing. Automatic dividend reinvestment inside the IRA is enough to trigger it, on the shares the reinvestment matches.

The other ways it fails

• Reading substantially identical as identical. The comparison is one of facts and circumstances, not of CUSIP numbers. Selling one sponsor's S&P 500 fund and buying another sponsor's S&P 500 fund is the classic risky call, because both track the same index.
• Forgetting the window runs backwards. A purchase in the 30 days before the sale triggers a partial wash sale on the matched shares. Anyone buying on a fixed schedule, or who happened to add to the position recently, is exposed to this without doing anything at all on the day of the sale.
• Dividend reinvestment inside the window. Of the wash sales that happen silently, this is the most common one. Even a small reinvested dividend taints a proportionate share of the loss.
• Treating the 1099-B as complete. A broker reports wash sales only within a single account and only for identical CUSIPs. Cross-account wash sales, spousal ones, and substantially-identical ones do not appear on it, and adding them to Form 8949 with code W is the preparer's responsibility.
• Identifying lots after the fact. If adequate identification was not made by the settlement date, FIFO is forced and the harvest can shrink or vanish entirely. The Tax Court has denied non-FIFO basis where the taxpayer could not prove a timely instruction to the broker.

A situation where this comes up

The pattern I see most is not exotic. Someone has a realized short-term gain from earlier in the year, a position in a taxable account sitting well below basis, and an IRA with dividend reinvestment switched on because it was switched on when the account was opened and never revisited.

The harvest looks clean. The sale happens in the taxable account, something different is bought the same day, and nothing in that account suggests a problem. The 1099-B will not flag anything either, because the reinvestment happened in a different account and a broker reports only within one. The loss is disallowed under Section 1091 all the same, and because the buyer was an IRA it is not preserved in anybody's basis. Rev. Rul. 2008-5 is the entire distance between a deduction delayed and no deduction at all.

The quieter version involves no wash sale. The lots were never identified at the trade, so FIFO applied and the shares actually sold were the oldest ones rather than the highest-basis ones. That is not fixable afterward, because the identification deadline was the settlement date. By the time anyone reconciles the year, the harvest is whatever FIFO produced.

One point about timing is worth stating on its own. The 61-day window straddles the sale in both directions, so a December sale reaches back into November and forward into January. A harvest is not finished on the day of the sale. It is finished 30 days later, and only if nothing substantially identical was bought in any of the accounts the rule reaches.