Tax-Loss Harvesting ETFs: Turn a Dip Into a Tax Break

Tax-loss harvesting ETFs is a simple idea with a few tricky rules: when an ETF in your taxable account is worth less than you paid, you can sell it, record the loss, use that loss to cut your taxes and put the money into a similar but not identical fund so you stay invested. Done carefully, a market dip becomes a tax break.

The part that trips people up with tax-loss harvesting ETFs is the wash sale rule, which can cancel the benefit if you buy back the same thing too soon. This post explains how the rule works, how much a loss can save you, how to think about picking a replacement fund when the IRS hasn’t drawn a bright line and a short checklist you can follow next time your account shows red.

What Harvesting Actually Means

Here’s the basic sequence:

You own an ETF in a taxable brokerage account that has fallen below your purchase price.
You sell it. The difference between what you paid and what you got is a realized capital loss.
You use the loss to offset capital gains. If the loss is larger than your gains, you can use some against ordinary income.
You buy a different fund so your money stays invested.

Per IRS Topic 409, if your capital losses are greater than your capital gains, you can deduct up to $3,000 of the excess against other income ($1,500 if married filing separately). Any remaining net loss carries forward to later years.

A quick but important note: tax-loss harvesting ETFs is a taxable-account strategy. The capital gains and losses it uses are the ones reported on Schedule D, per IRS Topic 409.

The Wash Sale Rule, in Plain English

The rule exists to stop you from selling for a loss and immediately buying the same thing back. Section 1091 of the Internal Revenue Code (26 U.S.C. § 1091) disallows a loss on a sale of stock or securities if, within 30 days before or after the sale, you acquire substantially identical stock or securities, or a contract or option to do so. The window is 30 days on each side of the sale, so with the sale day itself it spans 61 days. So for a sale on July 15, you’d have to buy before July 15 or after August 14.

Some key points from the statute and IRS guidance:

It covers stocks, securities, contracts and options. Section 1091 says “stock or securities” includes contracts or options to buy or sell them. Whether two funds are “substantially identical” is the gray area below.
Other accounts count too. In Revenue Ruling 2008-5, the IRS held that when you sell stock at a loss and your IRA or Roth IRA buys the same stock, the loss is disallowed and it doesn’t increase your basis in the IRA, so the loss isn’t recovered later.
You buy “before” as well as “after.” If you bought more shares in the 30 days before the sale, that can trigger the rule too.
The loss isn’t erased. Under section 1091, the new shares take the basis of the shares you sold, adjusted for any difference in price, so the loss is deferred rather than erased.

How Much Can You Save? A Worked Example

Here’s an invented example for a person named Riley. The tax rates are assumptions for illustration.

Riley bought an ETF for $20,000 in a taxable account. It’s now worth $16,000. Selling would create a $4,000 realized loss.

Scenario A: Riley also has a gain to offset. Suppose Riley sold another investment for a $4,000 long-term gain this year. The loss cancels it out, so Riley doesn’t owe tax on that gain. At an assumed 15% long-term rate, that saves $4,000 × 15% = $600.

Scenario B: Riley has no gains. The loss can offset up to $3,000 of ordinary income. At an assumed 24% rate, that saves $3,000 × 24% = $720. The remaining $1,000 carries forward to future years, per IRS Topic 409.

Scenario C: Riley buys the same ETF back in 10 days. That’s a wash sale. The $4,000 loss is disallowed and added to the basis of the new shares. If Riley paid $16,000 to buy back, the new basis becomes $16,000 + $4,000 = $20,000. There’s no loss this year.

Scenario	Result
A: gain to offset	$600 saved
B: no gains	$720 saved, $1,000 carried
C: rebuy in 10 days	$0, basis $20,000

One more thing worth noticing. In Scenario A or B, the replacement fund is bought at $16,000, so its basis is $16,000, not $20,000. If the market recovers and the replacement is worth $20,000, Riley would owe tax on a $4,000 gain whenever it’s sold. By my own reasoning from the basis math, harvesting is mostly a way to move taxes later and to use losses against gains or income at a favorable rate, not a way to erase taxes forever.

The 2026 long-term capital gains thresholds, according to Rev. Proc. 2025-32 as analyzed by Current Federal Tax Developments, are 0% up to $49,450 for single filers and $98,900 for joint filers, 15% up to $545,500 and $613,700, and 20% above those amounts. Your actual savings depend on your tax bracket.

Picking a Replacement: The Gray Area

This is where the care comes in. NerdWallet and Kitces both describe the guidance on funds and ETFs as limited, so there’s no clear checklist.

NerdWallet says that stocks of different companies generally don’t count as substantially identical, even in the same sector, but mutual funds and ETFs are a gray area because the IRS offers little specific guidance. Its suggestions for avoiding a wash sale include selling a single stock and buying an ETF in the same sector, or buying a fund that tracks a different index, such as the Dow Jones or Russell 1000 instead of the S&P 500.

Kitces explores this in more depth. A few findings from its article:

The only official reference it cites is former IRS Publication 564, which said “ordinarily, shares issued by one mutual fund are not considered to be substantially identical” to another fund’s shares, without defining when they would be.
A reader Q&A on the page describes a 70% overlap heuristic borrowed from the straddle rules, but the article doesn’t give an official citation. It describes this as a rule of thumb with “no bright line test” above 70%.
Two funds from different providers tracking the same index, like SPY and IVV, would “almost certainly” be treated as a wash sale, according to the author.
The author’s rough warning sign is a correlation above 0.95 between the sold fund and the replacement, and especially 0.99 or higher. For comparison, the page lists daily correlations of 0.991 for IVV and IWB (S&P 500 versus Russell 1000) and 0.989 for IVV and VTI.
Whether two funds are substantially identical is a facts-and-circumstances question that the IRS decides after the fact.

Please read those numbers as one expert’s heuristics, not official rules. In my view, the takeaway is that the more different the replacement is, the safer the swap, and the more similar it is, the more risk you’re taking. Kitces also points out that harvesting is only worth it if the tax benefit outweighs the tracking error you accept during the 61 days.

A Year-End Checklist

List your taxable-account holdings with their cost basis. Your brokerage shows unrealized gains and losses by tax lot.
Find holdings worth less than you paid. These are your candidates.
Check your gains for the year. Realized gains are what a loss offsets first.
Check the last 30 days of purchases. Buying more shares of the same fund just before the sale can trigger a wash sale.
Check every account. That includes IRAs and any account that receives automatic purchases.
Decide on the replacement. Pick one that tracks a different index or holds a meaningfully different set of investments, and read the warnings above.
Make the sale and the new purchase. Note the dates.
Write down the 61-day window. Don’t buy the sold fund back during that period, in any account.
Turn off automatic reinvestment and recurring purchases for the sold fund. By my own reasoning, an automatic buy is still a purchase, so it can fall inside the window.
Keep records. Your brokerage will report the sale, but keep your own record of the dates and basis.

Mistakes That Undo Tax-Loss Harvesting ETFs

Buying the same fund back in an IRA. Revenue Ruling 2008-5 says the loss is disallowed and doesn’t add to your IRA basis.
Choosing a nearly identical fund. Kitces describes same-index funds from different providers as almost certainly a wash sale.
Ignoring the $3,000 limit. Beyond the offset against gains, only $3,000 a year reduces ordinary income, with the remainder carried forward.
Letting taxes drive the portfolio. The replacement should still fit your plan. My post on ETF overlap shows how to check what the new fund actually holds.

When Harvesting Is Probably Not Worth the Trouble

Not every loss is worth chasing. A few situations where the benefit is small, based on the rules above:

The loss is tiny. A $200 loss at a 15% rate is $30 of tax, which may not justify the paperwork and the tracking error of a swap.
You have no gains and don’t expect any. Then the loss is limited to the $3,000 yearly deduction against ordinary income, with the rest carried forward.
The only good replacement is nearly identical. Kitces says a replacement with very low tracking error raises the chance of a wash sale, and that harvesting is only worth it if the tax deferral outweighs the tracking error you accept.

If any of those fit, skipping a harvest is a perfectly reasonable choice. The tax code will still be there next year.

Ask AI to Run the Numbers

Paste this into an AI assistant and fill in your own details.

Help me evaluate tax-loss harvesting for an ETF in my taxable account, using ONLY the numbers I give you.

ETF I'm considering selling: [name]
Total I paid (cost basis): $[amount]
Current value: $[amount]
Realized capital gains so far this year: $[amount]
Filing status and my federal marginal tax rate for ordinary income: [details]
My long-term capital gains rate: [rate]
Other accounts where I hold or buy this ETF or similar ones (including IRAs): [list]
Do I have automatic investments or dividend reinvestment into this ETF? [yes/no]
Replacement fund I'm considering: [name and the index it tracks]

Rules:
- Ask me for anything missing before you calculate.
- Show every calculation step by step: the realized loss, how much offsets gains, how much offsets ordinary income (limit $3,000 per year, $1,500 if married filing separately), what carries forward, and the estimated tax saved at the rates I gave.
- Explain the wash sale window (30 days before and after the sale, 61 days total) and flag any place where I might trigger it, including IRAs and automatic purchases.
- Do not tell me whether two funds are "substantially identical." Say this is a gray area, list what the IRS has and hasn't said, and tell me to ask a tax professional.
- Remind me the replacement will have a lower cost basis, so harvesting mostly defers tax.
- Do not predict the market or recommend specific funds.
- End with questions for my tax preparer.

My Take: Treat It as a Tool for Specific Years

I think of tax-loss harvesting ETFs as a good habit for years when the market gives you both a loss and a use for it. The numbers in Riley’s example show a modest benefit, hundreds of dollars on a $4,000 loss, but a larger account with larger gains to offset could see more.

I’d also say the gray area deserves respect. The sources are candid that the IRS can decide after the fact. So I’d lean toward replacements that are clearly different in index or holdings, and I’d bring the details to a tax professional if the amounts are large.

Questions People Ask About Harvesting Losses

How many days do I have to wait to buy the same ETF back? More than 30 days after the sale. The wash sale window is 61 days total, 30 days before and 30 after, per 26 U.S.C. § 1091.

Does the wash sale rule apply in my IRA? Yes. Per Revenue Ruling 2008-5, if your IRA or Roth IRA buys the same stock after you sell it at a loss, the loss is disallowed.

What if my loss is bigger than $3,000? Per IRS Topic 409, you can deduct the lesser of $3,000 ($1,500 if married filing separately) or your net loss against other income, and any excess carries forward.

Is it safe to swap an S&P 500 fund for a total market fund? That’s a gray area. Kitces lists daily correlation of 0.989 between IVV and VTI, which is in the range it calls a red flag. NerdWallet suggests funds tracking a different index, such as a Russell 1000 fund, but notes the IRS offers little specific guidance.

Your Year-End Starting Point

The first move in tax-loss harvesting ETFs is simply finding which holdings are underwater.

Log in to your taxable account, sort your holdings by unrealized gain or loss and write down any that are below what you paid. Then check your realized gains for the year. If you have both a loss and a place to use it, work through the checklist above, or bring that list to your tax preparer.

This post is general information, not financial, tax or legal advice, and it does not recommend buying or selling any security. Wash sale and tax rules are technical and can change, so confirm details with the IRS or a qualified tax professional.

Sources: