Not All Losses Are Equal: Which Ones to Harvest First
Two positions, same paper loss, wildly different tax savings. The IRS netting rules that determine which one actually works harder for you turn on details most investors never check before they sell.
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Picture two losing positions in a brokerage account, each down by $10,000. Sell either one before December 31 and the brokerage statement shows the same loss. The tax return can show very different savings.
Consider a single retiree whose 2026 taxable income lands in the 24% bracket, which starts above $105,700. If a short-term loss cancels short-term gains, she saves $2,400. If a long-term loss of the same size cancels long-term gains taxed at 15%, she saves $1,500. That’s a $900 gap on identical losses, and IRS netting rules explain all of it.
One Day Past a Year Changes Your Tax Rate
Per IRS Publication 550 for tax year 2025, an asset held 1 year or less produces a short-term gain or loss. Hold it longer than a year and the result is long-term, with the count starting the day after you buy and the day you sell counting too.
Short-term gains get taxed like wages, at ordinary rates that run from 10% to 37% in 2026. Long-term gains qualify for the lower capital gain rates, which Publication 550 lists as 0%, 15%, 20%, 25%, and 28% for 2025. The 25% and 28% rates cover special categories such as collectibles. Most stock gains fall into the first three.
Netting Order Sets What Each Loss Is Worth
The IRS makes you sort losses into two categories before anything impacts your tax bill. First, combine all short-term gains and losses, including any short-term capital loss carryover, into one net figure. Then do the same for long-term gains and losses, counting mutual fund capital gain distributions and long-term carryovers.
Only then do the categories meet. A net loss in one crosses over to reduce a net gain in the other. Publication 550 defines net capital gain. It is the portion that gets lower rates, defined as the amount by which net long-term capital gain for the year is more than your net short-term capital loss.
If losses still exceed gains after crossing over, up to $3,000 a year ($1,500 if married filing separately) offsets ordinary income. A loss saves whatever rate applied to the gain it cancels, so a short-term loss inside a categories full of short-term gains does the most work.
One bonus for Medicare participants: losses that cancel gains also lower the income Medicare checks for its premium surcharge, known as IRMAA. For 2026 premiums, the surcharge applies above $109,000 for single taxpayers and $218,000 for joint taxpayers.
Leftover Losses Keep Their Short-Term or Long-Term Label
Unused capital losses carryforward, and per Publication 550 a carried loss remains long-term or short-term. A long-term capital loss carryover reduces the following year’s long-term gains before it impacts short-term gains.
That has a planning cost. A large long-term carryover will soak up long-term gains first, and those are the cheapest gains you can realize. If you expect to trim recent winners in the following tax year, a short-term carryover is the more valuable kind to bank.
Which Losing Positions to Sell First
- Losses about to cross the one-year line. A lot bought 11 months ago at a loss still counts as short-term. If you hold short-term gains, sell it before the anniversary turns it into a cheaper long-term loss.
- Highest-cost lots (basis). These are picked by specific identification. Publication 550 lets you choose which shares you sell if you tell your broker or other agent the particular stock to be sold at the time of sale and receive written confirmation within a reasonable time. Skip that step and the IRS treats the securities you acquired first as sold. Those tend to be your oldest, lowest-cost shares, which carry the smallest loss.
- Some positions. These are ones you’d be content to replace. Buy substantially identical stock within 30 days of the sale and the wash sale rule prohibits the loss, adding it to the basis of the new shares. The old holding period carries over as well.
When a Long-Term Loss Saves Nothing
The 2025 Publication 550 table applies a 0% rate to long-term gains while taxable income remains at or below $48,350 for single taxpayers, $64,750 for heads of household, and $96,700 for married couples filing jointly. The IRS adjusts these lines for inflation every year, so check the 2026 figures in Revenue Procedure 2025-32 before you sell.
A retired couple below that line already owes nothing on long-term gains. If they realize a long-term loss in that year, netting forces it to cancel gains that were never going to be taxed. The loss does more good saved for a year with short-term gains or higher income, since state income taxes follow their own rules and a 0% federal year may still carry a state bill.
A Four-Step Rule for Choosing Which Losses to Harvest
Use short-term losses against short-term gains first. Sell short-term losers before they turn a year old. Pick the highest-cost lots by specific identification and get the broker’s written confirmation. Harvest long-term losses last, and only when your long-term gains sit above the 0% line.
When gains, carryovers, and Medicare thresholds all land in the same tax year, it pays to run the numbers with a CPA or fiduciary advisor before you place the trades.
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Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
