Sell $30,000 of Losing Stock Before Dec. 31 and Convert $30,000 to a Roth the Same Week, and the Loss Erases Only $3,000 of the Conversion’s Tax Bill. The Other $27,000 of Loss Waits for Future Gains

Tax-loss harvesting and Roth IRA conversions often get matched as year-end moves, and the pairing looks clean on paper. A $30,000 loss in a taxable brokerage account seems like it should cancel a $30,000 conversion. The tax code treats those two items differently. A conversion counts as ordinary income. A harvested loss is a capital loss, and capital losses can offset ordinary income only in limited amounts. In most cases, that means only $3,000 of the loss reduces the conversion’s taxable income this year.

Why a Capital Loss Can’t Fully Cancel Conversion Income

The IRS treats a conversion as a taxable distribution. According to Publication 590-A, converted amounts must be included in gross income and are “normally included in income on your return for the year that you converted them”. The Internal Revenue Code says the same thing in 26 U.S.C. § 408A(d)(3)(A)(i). That income is taxed at ordinary rates, the same as wages.

Capital losses work under a separate rule. Under 26 U.S.C. § 1211(b), losses are allowed first against capital gains. Any loss left over can offset ordinary income only up to the lower of $3,000 ($1,500 for a married individual filing separately) or the excess loss itself. Someone who harvests $30,000 of losses and has no other gains can therefore apply $3,000 against the conversion. The remaining $27,000 carries forward under 26 U.S.C. § 1212(b), and each piece keeps its short-term or long-term character.

What the Math Looks Like in the 22% Bracket

For 2026, the IRS applies the 22% rate to single filers with taxable income over $50,400 or married couples filing jointly with taxable income over $100,800. For a filer whose whole conversion lands in that bracket, here is how the numbers work out:

The harvested loss covers about a tenth of the conversion’s tax bill. The other assumption to check is the bracket ceiling. The 24% rate starts above $105,700 for single filers and $211,400 for joint filers. If a conversion pushes income past that line, the dollars above it are taxed at the higher rate, and the $3,000 deduction offsets even less of the total.

A 1978 Limit Meeting 2026 Tax Brackets

The cap is low because it has never been adjusted for inflation. The $3,000 limit has remained unchanged since 1978, according to Rep. Ralph Norman’s office, which has introduced legislation to raise it. The Congressional Research Service estimated that indexing the limit for price changes since then would put it at about $13,000 in 2022 dollars.

Meanwhile, tax brackets and the standard deduction rise every year. The 2026 standard deduction is $16,100 for single filers and $32,200 for joint filers. Because of that mismatch, a large harvested loss is used up slowly on its own. With no future capital gains, the $27,000 carryforward would take 9 years to use up at $3,000 per year.

Where the $27,000 Carryforward Earns Its Keep

Against future capital gains, the carryforward has no cap. It offsets gains dollar for dollar. IRS Publication 550 explains that a long-term capital loss carried forward “will reduce that year’s long-term capital gains before it reduces that year’s short-term capital gains.” Rebalancing a portfolio, selling a fund that has gained value, or receiving year-end mutual fund distributions can all produce gains that the $27,000 can absorb in full.

The carryforward has limits worth knowing, as Publication 544 states that capital losses “cannot be carried over after a taxpayer’s death,” which matters for older savers doing conversions late in life. The wash-sale rule in 26 U.S.C. § 1091(a) also disallows the loss if substantially identical securities are bought within 30 days before or after the sale.

Timing Both Moves Before Dec. 31

Doing both moves in the same week still works. The return is just spread out differently than many people expect. The conversion’s tax is due mostly this year. The loss pays off mostly in future years, and how fast depends on how many capital gains the household realizes later. (The cheapest years to run a conversion are usually the quiet stretch between a last paycheck and the first required withdrawal, which we sized up in a free Roth guide here: The Roth Window.)

Three points determine how well the pairing works:

1. Size the conversion to the bracket. Keeping the converted amount under the 22% ceiling of $105,700 for single filers keeps the math in the table above accurate.
2. Match the loss with gains this year. A harvested loss offsets realized capital gains in the same year with no cap. If there are gains to offset, the loss does far more than $3,000 of work right away.
3. Plan the tax payment. Publication 590-A notes that conversion income may require increased withholding or estimated tax payments. Paying that bill from cash outside the IRA leaves the full converted amount growing tax-free in the Roth.

In this scenario, a $30,000 loss reduces the $6,600 conversion bill by $660. The other $27,000 loss is still valuable, but it waits to offset future capital gains.

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