Capital gains, tax-loss harvesting and the wash-sale rule

When you sell an investment, the tax depends on three things: how long you held it, what else you sold that year, and whether you bought it back too soon. This article walks through each one in order, with the 2026 thresholds, how losses net against gains, and the wash-sale rule that trips up careful people every December.

Short term or long term: the holding period

The first question is the calendar. If you held the asset more than one year before selling, the gain or loss is long-term; one year or less, and it is short-term. ¹ Inherited and gifted property have their own holding-period rules, which the IRS notes as exceptions. ¹

The difference matters because the two are taxed differently. Net short-term gains are taxed as ordinary income, at the same graduated rates as wages. ¹ Net long-term gains get their own, lower rate schedule.

The 2026 long-term rates

Most net long-term gain is taxed at 0%, 15% or 20%, depending on your taxable income and filing status. ¹ The breakpoints are measured on taxable income, after deductions, not on the gain alone:

Above the second column, the 20% rate applies. We find it helps to picture the gain stacked on top of your other taxable income: the part of the stack that sits below a breakpoint gets the lower rate, and only the part above it moves up.

Two categories sit outside that schedule. Gain on collectibles, such as coins or art, is taxed at up to 28%, and unrecaptured section 1250 gain on real property at up to 25%. ¹

The surtax on top

Higher earners can also owe the net investment income tax of 3.8%. It applies to the smaller of your net investment income or the amount by which modified AGI exceeds the threshold: $200,000 for single or head of household, $250,000 for married filing jointly. Gains on stocks, bonds and mutual funds count as net investment income. ⁶

Netting: gains and losses meet first

You do not pay tax on each sale by itself. Short-term gains and losses net against each other, long-term gains and losses net against each other, and then the two results are combined. ¹ That is why a loss on one position can cancel a gain on another in the same year.

If the losses are larger, the net capital loss can offset ordinary income, such as wages, up to $3,000 a year, or half that if you are married filing separately. ³ Anything over the limit is not lost. It carries over to the next year and later years until it is used up, and it keeps its character as short-term or long-term. ²

Tax-loss harvesting, in plain terms

Tax-loss harvesting is just using that netting on purpose. Before the year ends, you sell a holding that is worth less than you paid, so the loss offsets gains you already have, or up to the yearly limit of ordinary income. Most people then want to stay invested, so they buy something back. That second step is where the wash-sale rule comes in.

The wash-sale rule

A wash sale happens when you sell stock or securities at a loss and, in the 30 days before or the 30 days after the sale, you buy substantially identical stock or securities. ² The window runs in both directions, so a purchase made in the month before the sale counts too. ⁴

Publication 550 lists four ways to trigger it: buying substantially identical stock or securities, acquiring them in a fully taxable trade, acquiring a contract or option to buy them, or acquiring them for your IRA or Roth IRA. ² It also applies if your spouse, or a corporation you control, buys substantially identical stock. ² Shares received as a stock bonus at work can count as a purchase too. ²

What happens to the loss. In the ordinary case it is postponed, not erased. You add the disallowed loss to the cost of the new shares, which raises their basis, and your holding period for the new shares includes the time you held the old ones. ² You get the loss back later, when you sell the new shares outside the window.

The IRA exception to that. When the replacement is bought inside your IRA or Roth IRA, Publication 550 does not add the disallowed loss to the basis of the new shares. ² An IRA has no basis to adjust in the same way, so in practice the loss does not come back later.

What "substantially identical" means. There is no bright-line list. The IRS says you must consider all the facts and circumstances, and that stock of one corporation is ordinarily not substantially identical to stock of another, with exceptions such as a reorganization. ² For funds that track similar indexes, there is no IRS list to check against; the facts-and-circumstances test is all there is.

Reporting: Form 8949 and Schedule D

Most sales go on Form 8949, and the totals flow to Schedule D. ¹ Your broker's Form 1099-B generally shows any wash-sale loss it disallowed, and the Schedule D instructions tell you to report a wash sale on Form 8949 with code W. ⁵ A broker is required to report a wash sale only when the sale and the purchase happen in the same account and involve the same security, so purchases in a different account, an IRA or a spouse's account are yours to watch. ⁷