Tax-Loss Harvesting Rules: Capital Losses, the $3,000 Deduction, and Carryforwards

Tax-loss harvesting means selling a position at a loss on purpose so that loss can offset your taxable gains. The order matters: short-term losses net against short-term gains first, long-term losses net against long-term gains first, and only then does one category cross over to offset the other. If your losses still exceed your gains after all that netting, you can deduct up to $3,000 of the excess against ordinary income, or $1,500 if you file married filing separately. Anything left carries forward to future years and keeps its short-term or long-term character. Harvesting is mostly about cancelling gains, not about wiping out salary tax.

What tax-loss harvesting actually does

The headline benefit is not a deduction against your paycheck. It is the cancellation of a gain you would otherwise be taxed on. Every dollar of gain you offset with a harvested loss saves you the tax on that dollar, including any 3.8% NIIT that would have applied. That is the real money. The $3,000 ordinary-income deduction is a secondary benefit that only shows up when your losses outrun your gains entirely.

Short-term and long-term net separately first

Schedule D runs in two lanes before the lanes meet. Short-term gains and short-term losses combine into one net short-term figure. Long-term gains and long-term losses combine into one net long-term figure. Only after each lane is netted does a net loss in one lane offset a net gain in the other.

Why short-term losses are often the most valuable

A short-term loss first cancels short-term gains, which are taxed at your full ordinary rate. A dollar of short-term gain wiped out at a 32% rate saves more than a dollar of long-term gain wiped out at 15%. So when you choose which losing lots to harvest, the ones offsetting high-rate short-term gains usually give the biggest payoff.

The $3,000 limit and the $1,500 MFS limit

If your total net capital loss is bigger than your total net gain, you have a net capital loss for the year. You cannot deduct all of it at once. You can deduct up to $3,000 of it against ordinary income, or $1,500 if you are married filing separately. The rest does not vanish. It carries forward.

A worked example: offsetting a gain

Here is a single filer with a $20,000 long-term gain who harvests an $8,000 long-term loss. We ran it through the Capital Gains Calculator.

The $8,000 loss nets against the $20,000 gain, leaving a $12,000 taxable long-term gain.
Tax at 15%: $1,800.
Without the harvest, the full $20,000 would be taxed at 15%, which is $3,000.
The harvest saved $1,200.

Use the Capital Gains Calculator to see your own harvest savings against a no-loss baseline.

A worked example: a pure loss carryforward

Now take a single filer with no gains and a $10,000 long-term loss.

There are no gains to offset, so the whole $10,000 is a net capital loss.
You deduct $3,000 against ordinary income this year, dropping taxable income from $120,000 to $117,000.
The remaining $7,000 carries forward to 2027 as a long-term loss.

That carryover keeps its long-term character. Next year it first offsets long-term gains, and if you still have a net loss, another $3,000 can come off ordinary income. A large loss can take several years to fully absorb through the $3,000 annual limit.

Timing, lots, and the wash-sale trap

Harvesting has moving parts. Which tax lots you sell changes the loss you realize. The timing decides which year the loss lands in. And the wash-sale rule can disallow the loss entirely if you buy the same or a substantially identical security within 30 days. A harvest that trips the wash-sale rule gives you no deduction this year, so the replacement security you choose matters as much as the sale itself.

Open the Capital Gains Calculator to test a harvest before you place the trade.

Sources

Last reviewed: June 21, 2026.

Frequently Asked Questions

How much capital loss can I deduct in a year?

You can deduct net capital losses against your gains in full, plus up to $3,000 of any remaining net loss against ordinary income. The limit is $1,500 if you file married filing separately. Losses beyond that carry forward to future years.

Do capital loss carryforwards expire?

No. Capital loss carryforwards have no expiration. They carry forward year after year until they are used up, offsetting gains and taking up to $3,000 off ordinary income each year. They also keep their short-term or long-term character.

Does tax-loss harvesting reduce my income tax on wages?

Only in a limited way. Harvesting mainly offsets your capital gains. It reduces wage tax only through the $3,000 ordinary-income deduction, which applies when your net capital losses exceed your gains for the year.