Ask the Editor, October 10: Capital Losses and the Wash Sale Rule

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at questions on capital-loss harvesting and the wash-sale rule. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. What is capital-loss harvesting?

Question: I keep hearing about capital loss harvesting as a strategy for year-end tax planning. What is capital loss harvesting?

Joy Taylor: Tax-loss harvesting (or capital-loss harvesting) is a way for investors to lower their federal income tax bills. The strategy involves selling stocks or other securities in your taxable investment accounts that have declined in value for the purpose of generating capital losses to offset capital gains from the sale of winners that you have sold during the year. Investors commonly do this closer to the end of the year, when they have a better idea of the amount of capital gains they will have.

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2. What is the wash sale rule?

Question: I sold stock earlier this year for a large taxable gain. I have another stock that’s not performing well right now, so I want to sell it at a loss to help offset the capital gain. Can I then immediately buy back the stock I sell at a loss?

Joy Taylor: No. The wash sale rule in the federal tax code prevents this. You can’t deduct a capital loss from a sale of securities if you buy substantially identical securities up to 30 days before or after the sale. The recognized loss isn’t gone forever; it’s only suspended. That’s because the loss is added to the tax basis of your replacement securities.

3. How do wash sales apply between spouses?

Question: I sold stock from my taxable account this year at a loss. My spouse purchased stock in the same company the next day. Will the wash sale rule prevent me from deducting the capital loss from my stock sale?

Joy Taylor: Yes. The wash sale rule is a sneaky rule that can easily catch people by surprise. For example, selling a mutual fund at a loss 30 days after the date a dividend is reinvested can lead to a wash sale. Also, buying stock in an IRA after selling the same stock at a loss in your taxable investment account results in a wash sale. You also have a wash sale if you sell securities, and your spouse or a corporation that you control buys substantially identical securities within the 60-day period.

4. What if I sell crypto at a loss?

Question: I own Bitcoin and I sold some at a loss earlier this year. About a week later, I bought some more Bitcoin. Does the wash sale rule prevent me from deducting the capital loss on the sale?

Joy Taylor: No. The wash sale rule doesn’t apply to taxpayers who sell cryptocurrency at a loss. The definition of securities for the purposes of the wash sale rule doesn’t include crypto. So, for example, if you own crypto that sharply falls in value, you can sell it, recognize a capital loss, and buy the same digital currency the same day or soon after.

5. How much capital losses can I deduct?

Question: How much capital loss can I deduct on my federal income tax return?

Joy Taylor: Your capital losses can offset your capital gains (which is why tax-loss harvesting is a popular strategy), plus up to $3,000 of other income ($1,500 if you are married and filing a separate return from your spouse). Excess losses are carried over to the next year and can help reduce future capital gains. For individuals, capital losses can be carried over indefinitely until they are used up.

For example, say you have $25,000 of capital gains and $40,000 of capital losses in 2025. You can use $25,000 of your capital loss to wipe out your capital gain. You can then deduct $3,000 of excess capital loss on your 2025 Form 1040 against your wages or other ordinary income and carry forward $12,000 of losses to the next year. You would use the capital loss carryforward worksheet in the instructions for Schedule D of the 1040 to figure the amount of capital loss that you can carry forward to 2026.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions about tax topics. You'll find full details of how to submit questions in each publication. Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.

We have already received many questions from readers on topics related to tax changes in the One Big Beautiful Bill and more. We will continue to answer these in future Ask the Editor round-ups. So keep those questions coming!

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• Ask the Editor: Questions on Capital Gains
• Ask the Editor: Questions on Four New Tax Deductions
• Ask the Editor: Questions on Inherited IRAs
• Ask the Editor: Questions on Home Sales and Taxes