2026 Year-End Tax Guide
Tax-Loss Harvesting Rules for 2026: Wash Sales, Limits, and the Pennsylvania Catch
Tax-loss harvesting means selling an investment that trades below its cost basis so you realize a capital loss. You then use that loss to offset realized capital gains. On your federal return it can also offset up to $3,000 of ordinary income each year. Federal losses you can't use carry forward. Pennsylvania losses generally do not.
This guide covers the tax loss harvesting rules that apply in 2026: how gains and losses are netted, the annual limit, the 30-day wash-sale rule, and the Pennsylvania rules that national guides tend to skip. It is written for founders, business owners, and high-income W-2 earners who want to make decisions before December 31.
The Core Idea
What Tax-Loss Harvesting Can and Cannot Do
Harvesting turns a paper loss into a realized loss that can reduce this year's taxable gains. How much it helps depends on your situation. It tends to help most when you already have realized capital gains, for example from a concentrated stock sale, a liquidity event, or rebalancing, and those gains would otherwise be taxed at higher rates.
Harvesting often defers tax rather than eliminating it. You realize a loss and then buy a replacement at the lower current price, so the replacement generally starts with a lower cost basis. If it rises later, you may have a larger taxable gain when you sell. This is different from a wash sale, where the disallowed loss is generally added to the replacement's basis. Whether harvesting helps in the end depends on the time value of the deferred tax, future tax rates, and whether the investment is eventually sold, donated, or held until death.
2026 Long-Term Capital Gains Rate Thresholds (Taxable Income)
| Filing Status | 0% Up To | 15% Up To | 20% Above |
|---|---|---|---|
| Single | $49,450 | $545,500 | $545,500 |
| Married Filing Jointly | $98,900 | $613,700 | $613,700 |
Source: IRS Rev. Proc. 2025-32, Section 4.03, as of October 20, 2026. A 3.8% net investment income tax may also apply above $200,000 of MAGI (single) or $250,000 (married filing jointly), according to the IRS.
The Numbers That Set the Rules
Tax-Loss Harvesting Rules at a Glance
$3,000
Maximum yearly federal net capital loss deduction against ordinary income ($1,500 married filing separately)
61 Days
Federal wash-sale window: 30 days before the sale, the sale date, and 30 days after
3.07%
Flat Pennsylvania personal income tax rate on net gains from property
0 Years
Pennsylvania loss carryforward or carryback period
Sources: IRS Topic 409, IRS Publication 550, and PA Department of Revenue, as of October 20, 2026.
Federal Rules
How Federal Netting, the $3,000 Limit, and Carryforwards Work
Federal law nets gains and losses in a set order. The order matters because short-term gains are taxed at ordinary income rates, while long-term gains usually get the lower rates shown above. A harvested loss is often worth more when it offsets short-term gains, depending on your bracket and how your gains and losses are mixed.
Net Within Each Holding Period
Short-term losses (on assets held one year or less) first offset short-term gains. Long-term losses first offset long-term gains.
Net Across Holding Periods
A net loss in one category then offsets a net gain in the other. For example, a net long-term loss can reduce net short-term gains.
Apply Up to $3,000 Against Ordinary Income
If losses remain after netting, you can deduct the smaller of the net loss or $3,000 ($1,500 if married filing separately) against wages and other ordinary income, according to IRS Topic 409. For a high earner, that annual deduction is small compared with the gains a loss can offset.
Carry the Rest Forward
An individual's unused federal capital losses generally carry forward to later years and keep their short-term or long-term character, per IRS Publication 550. They do not outlive the taxpayer. Under IRS Publication 559, a decedent's unused losses can be deducted only on the final return. A carryforward may offset the capital gain portion of a future business sale. Business sales, however, can produce a mix of capital gain and ordinary income, such as depreciation recapture or amounts allocated to inventory and receivables. Federal and Pennsylvania treatment can also differ. How the purchase price is allocated and how the deal is structured determine how much of the gain a carryforward can offset.
The 30-Day Rule
The Wash-Sale Rule, Including Spouse and IRA Purchases
Under IRC Section 1091, a federal loss on stock or securities is disallowed if you acquire substantially identical securities, or a contract or option to acquire them, during the 30 days before the sale, on the sale date, or during the 30 days after. In most cases the disallowed loss is added to the cost basis of the replacement shares, so the deduction is postponed rather than lost.
The IRS does not publish a bright-line test for "substantially identical." Shares of the same company clearly qualify. For investments that track very similar exposures, reasonable people can disagree, so make that judgment with your CPA.
- 1 Your spouse's accounts count. According to IRS Publication 550, a substantially identical purchase by your spouse, or by a corporation you control, can trigger a wash sale.
- 2 An IRA purchase can wipe out the loss for good. Under Rev. Rul. 2008-5, if your IRA or Roth IRA buys substantially identical securities within the window, the loss is disallowed and the IRA's basis does not increase. You never get the deduction.
- 3 Automatic reinvestment matters. Dividend reinvestments and scheduled purchases in your accounts, your spouse's, and your IRAs can count as acquisitions inside the 61-day window.
- 4 The window runs both ways. Waiting 31 days after the sale does not protect the loss if substantially identical securities were bought in the 30 days before it. Moving to a holding that is not substantially identical avoids the rule, but the replacement may perform differently, and staying out of the market risks missing a rebound.
- 5 Wash sales can be partial. Per IRS Publication 550, if you buy back fewer shares than you sold at a loss, only the loss on the matched shares is disallowed. The rest can still be deducted.
The Pennsylvania Catch
How Pennsylvania Treats Harvested Losses Differently
In Pennsylvania, a harvested loss counts on the state return only in the year you take it, only against gains in the same income class, and only against gains of the same spouse. The Pennsylvania Department of Revenue treats "net gains or income from the disposition of property" as one of eight separate income classes. Losses in that class cannot reduce wages, business income, or income in other classes, and they cannot be carried to another year.
| Rule | Federal (2026) | Pennsylvania PIT (2026) |
|---|---|---|
| Rate on gains | 0%, 15%, or 20% long-term; ordinary rates for short-term | Flat 3.07%; no short-term vs. long-term distinction |
| Offset against wages or ordinary income | Up to $3,000 per year | Not allowed; no netting across income classes |
| Unused losses | Individual losses carried forward during the taxpayer's lifetime | No carryforward or carryback |
| Spousal netting on a joint return | Losses and gains combine | One spouse's loss cannot offset the other spouse's gain |
| Wash-sale rule | Applies (IRC Section 1091) | Federal wash-sale rules do not apply; each transaction stands alone |
Sources: PA PIT Guide: Net Gains (Losses) and PA PIT Guide: Brief Overview, both updated October 3, 2026.
Time Losses to the Gain Year
A loss carried forward federally into next year's sale does nothing on the Pennsylvania return. Harvesting in the same calendar year as the gain may preserve the state offset. It only works against the part of the gain Pennsylvania treats as a disposition of property. Inventory, and in some cases business assets replaced with similar property, may be classed as business income instead.
Match the Spouse to the Gain
For Pennsylvania, how each account is titled matters. A loss in one spouse's individual account generally cannot reduce gains reported by the other spouse, even on a joint return.
Expect Federal and State Results to Differ
Because Pennsylvania treats each sale on its own, a loss the IRS disallows as a wash sale may still count on your state return. Confirm the reporting with your CPA before you file.
For the full state picture, including installment sales and business exits, see our guide to Pennsylvania capital gains tax in 2026 and our overview of the tax implications of selling a business in Pennsylvania.
Before the Year Closes
December 31 Tax-Loss Harvesting Checklist
For losses, the trade date generally determines which tax year a sale falls in. Leave time for settlement questions, lot selection, and coordination with your other year-end moves. Our year-end tax planning guide for 2026 covers the related deadlines.
For highly appreciated positions, giving the shares to charity may be worth comparing with selling them. Our guide to donor-advised fund tax benefits explains that trade-off. Conversion timing is covered in our Roth conversion strategy for high earners.
The Other Side of the Ledger
When Tax-Loss Harvesting May Not Make Sense
Harvesting is a tool, not something to do every December by default. In several common situations the trade-offs may outweigh the benefit.
Low-Bracket Years
After a business sale, in early retirement, or during a sabbatical, your current rate may be lower than your future rate. It may be worth considering realizing gains on purpose instead.
The 0% Capital Gains Rate
If 2026 taxable income stays under $49,450 (single) or $98,900 (joint), long-term gains may be taxed at 0% federally. Harvesting losses against those gains may save little or no federal tax, and it uses up a loss that could be worth more carried into a higher-rate year. An allowable loss may still save Pennsylvania tax, because the state taxes the same taxpayer's gains in the same year at 3.07%.
Transaction Costs and Spreads
Bid-ask spreads, trading costs, and any fund redemption fees can eat up the tax savings on small losses, especially when only the $3,000 ordinary-income offset is available.
Lower Basis Later
A replacement bought at today's lower price generally carries a lower cost basis than the original. If it rises and you sell it later, the larger gain may be taxed at higher rates. Selling, donating, or holding until death each lead to a different result.
No Pennsylvania Gains This Year
Pennsylvania has no carryforward, so a loss harvested in a year when that spouse has no property gains gives no state benefit.
Portfolio Drift
A replacement chosen mainly to avoid a wash sale may not fit your allocation, risk targets, or investment reasoning.
For high-income W-2 earners, harvesting is usually one tool among several. See our W-2 tax planning strategies for high-income earners and our breakdown of how to manage income near the 32% bracket.
Our Perspective
Why We Look at Harvesting as Part of the Whole Tax Plan
Defiant Capital Group is an independent, fiduciary RIA led by Jonathan Dane, CFA, CFP. Our founders have dealt with this kind of financial complexity themselves. We look at harvesting alongside everything else on the return: realized gains from a liquidity event, equity compensation, Roth conversions, charitable giving, and Pennsylvania's income-class rules.
For a Pennsylvania household, the same trade can produce one result on the federal return and a different one on the state return. We model both before recommending a sale. Any tax savings depend on your circumstances and can involve investment trade-offs.
What We Review Together
- Realized and expected gains across federal and Pennsylvania returns
- Wash-sale exposure across spouse, IRA, Roth IRA, and trust accounts
- Lot selection and replacement holdings within your investment policy
- Coordination with your CPA on reporting and carryforwards
Common Questions
Tax-Loss Harvesting Rules: Frequently Asked Questions
What Is the $3,000 Loss Rule?
Capital losses first offset capital gains, with no limit. If losses exceed gains, up to $3,000 of the net loss ($1,500 if married filing separately) can reduce ordinary income such as wages on your federal return, and anything left carries forward. Pennsylvania does not allow capital losses to offset wages.
What Is the Maximum Stock Loss Write-Off Amount in 2026?
In 2026, capital losses used to offset capital gains have no limit. The limit applies only to the net loss deducted against ordinary income: $3,000, or $1,500 if married filing separately, according to IRS Topic 409. An individual's unused federal capital losses generally carry forward indefinitely during the taxpayer's lifetime and keep their short-term or long-term character. They generally end at death, since IRS Publication 559 allows a decedent's losses only on the final return. Trusts, estates, and corporations follow different rules.
Is There a Downside to Tax-Loss Harvesting?
Yes. Harvesting often defers tax rather than eliminating it, because a replacement bought at a lower price generally has a lower cost basis and may produce a larger gain later. Other downsides include trading costs, the risk of being out of the market during the wash-sale window, a replacement that tracks the original imperfectly, and using up a loss on gains that would have been taxed at 0% federally.
Does the Wash-Sale Rule Apply to My Spouse or My IRA?
Yes, for federal purposes. IRS Publication 550 says a substantially identical purchase by your spouse, or by a corporation you control, can trigger a wash sale. Under Rev. Rul. 2008-5, a purchase in your IRA or Roth IRA within the window disallows the loss without increasing the IRA's basis, so the loss is effectively gone for good. Children's accounts and most trusts are not automatically covered, though your CPA should review any related-party purchases.
Does Pennsylvania Allow Capital Loss Carryforwards?
No. The PA Department of Revenue does not allow losses to be carried forward or back between tax years. Losses also cannot offset income in other income classes or the other spouse's gains. In Pennsylvania, harvesting helps only in a year when the same taxpayer has gains from property dispositions.
Can I Sell at a Loss and Buy the Same Investment Back?
Yes, but to keep the federal deduction you generally must not acquire substantially identical securities during the 30 days before the loss sale, on the sale date, or during the 30 days after. Purchases in your spouse's accounts and your IRAs count. Dividend reinvestments and automatic purchases during the window can also create a wash sale. If the repurchase covers fewer shares than you sold, only the loss on the matched shares is disallowed. The price may also move against you while you wait.
Sources (As of October 20, 2026)
- IRS Rev. Proc. 2025-32: 2026 inflation adjustments, capital gains rate thresholds
- IRS Topic 409: Capital gains and losses, $3,000 limit, and carryovers
- IRS Publication 550: Investment income and expenses, wash sales, partial wash sales
- IRS Publication 559: Survivors, executors, and administrators; decedent's capital losses
- IRS Internal Revenue Bulletin 2008-3: Rev. Rul. 2008-5 on IRA purchases
- IRS Net Investment Income Tax
- PA PIT Guide: Net Gains (Losses) from the Sale, Exchange, or Disposition of Property
- PA PIT Guide: Net Income (Loss) from the Operation of a Business, Profession or Farm
- PA PIT Guide: Brief Overview and Filing Requirements
- PA Department of Revenue: Personal Income Tax Rates
Plan Before December 31
Review Your 2026 Gains and Losses With a Fiduciary Team
Our team can review your realized gains, your wash-sale exposure across your accounts, your spouse's, and your IRAs, and your Pennsylvania position, then coordinate with your CPA before year-end. Whether harvesting fits depends on your situation, and it may not be the right move every year.
Schedule a Consultation412-697-1435 · defiant@defiantcap.com · Warrendale | Wexford | Pittsburgh, PA