Tax-loss harvesting and the wash-sale rule
Harvesting means selling a position that is below your cost basis to realize the loss, then reinvesting the proceeds so you stay in the market. Realized losses first offset realized capital gains of the same character, then offset the other character, then reduce ordinary income by up to $3,000 per year for joint or single filers. Anything left carries forward indefinitely, which is why a large harvest in a bad market can shelter gains for years.
The constraint is the wash-sale rule. If you sell at a loss and buy the same or a substantially identical security within 30 days before or 30 days after the sale, the loss is disallowed and instead added to the basis of the replacement shares. The window is 61 days total. Four details trip people up:
- The rule applies across all your accounts, including your spouse's accounts and accounts at other brokerages.
- Buying the replacement inside an IRA permanently destroys the loss rather than deferring it.
- Automatic dividend reinvestment counts as a purchase, so turn it off in the position you are harvesting.
- Two different index funds tracking the same index are risky ground. Swapping between funds tracking meaningfully different indexes is the common practice.
Harvesting defers rather than eliminates tax, because your replacement shares carry a lower basis. It creates real value when the deduction lands in a high-bracket year and the eventual gain is realized in a low-bracket year, when losses offset short-term gains taxed at ordinary rates, or when the shares are eventually donated or held until death.
Do not harvest into a lower-quality holding. The tax benefit of a loss at a 24% bracket is real but modest. Permanently owning a worse fund to capture it is not a trade worth making.
ETFs, mutual funds, and unwanted distributions
In a taxable account, fund structure is a tax decision. A mutual fund that must sell holdings to meet redemptions distributes the resulting capital gains to everyone still holding shares, including someone who bought last month and has no gain of their own. ETFs generally avoid this because redemptions happen in kind through authorized participants, and broad index ETFs frequently go years without distributing a capital gain at all.
Practical rules for taxable accounts. Prefer broad-market index ETFs or index mutual funds with low turnover. Check a fund's distribution history and its estimated year-end capital gain before buying in November or December, because you can inherit a distribution days after purchase. Avoid holding high-turnover active funds, high-yield bond funds and REIT funds in taxable accounts, since their income is taxed at ordinary rates.
The same logic applies in reverse: none of this matters inside an IRA or 401(k), where distributions have no current tax consequence. That is precisely why the tax-inefficient holdings belong there.
Municipal bonds and taxable-equivalent yield
Interest from most municipal bonds is exempt from federal income tax, and interest from bonds issued in your own state is often exempt from state tax too. The comparison you need is the taxable-equivalent yield: divide the muni yield by one minus your marginal tax rate. A 3.6% muni yield for someone in the 32% federal bracket equals 3.6% divided by 0.68, or 5.29% of taxable yield. In the 12% bracket the same bond is only worth 4.09% equivalent, which is why munis rarely make sense for lower-bracket investors or inside a retirement account.
| Marginal federal rate | Muni yield 3.0% | Muni yield 3.6% | Muni yield 4.2% |
|---|---|---|---|
| 12% | 3.41% | 4.09% | 4.77% |
| 22% | 3.85% | 4.62% | 5.38% |
| 24% | 3.95% | 4.74% | 5.53% |
| 32% | 4.41% | 5.29% | 6.18% |
| 35% | 4.62% | 5.54% | 6.46% |
| 37% plus 3.8% NIIT | 5.10% | 6.12% | 7.14% |
Two cautions. Municipal interest is included in the calculation of how much of your Social Security benefit is taxable and in the modified adjusted gross income used for Medicare IRMAA surcharges, so tax-exempt does not mean invisible. And a small number of private activity bonds can trigger alternative minimum tax, though the 2026 AMT exemptions of $90,100 for unmarried and $140,200 for joint filers keep most households clear.
Donor-advised funds, QCDs, and the 0% bracket
Three techniques handle most charitable and low-bracket planning.
Donor-advised funds. You contribute cash or, better, appreciated securities in one year, take the deduction that year, and grant the money to charities over time. Donating shares you have held more than a year avoids the capital gain entirely while generally supporting a deduction for full fair market value. This pairs well with bunching: with a $32,200 joint standard deduction in 2026 and a new floor limiting itemized charitable deductions to amounts above 0.5% of adjusted gross income, concentrating several years of giving into one year is often the only way to get a deduction at all.
Qualified charitable distributions. If you are at least 70.5, you can direct money from an IRA to a qualifying charity and exclude it from income. The Congressional Research Service reports the 2026 limit at $111,000 per individual, up from $108,000 in 2025, with a one-time $55,000 option for a split-interest entity such as a charitable gift annuity or charitable remainder trust, per the CRS overview of qualified charitable distributions. A QCD can satisfy part or all of a required minimum distribution and, because it never enters adjusted gross income, it also helps with Social Security taxation and Medicare surcharges. That makes it better than a deduction for most retirees.
The 0% capital gains bracket. In a year when taxable income is low, early retirement, a sabbatical, a business loss, you can realize long-term gains at 0% federal tax. A joint filer with $60,000 of taxable income has roughly $38,900 of room before the 15% rate starts in 2026. Sell, immediately repurchase, and your basis resets higher with no federal tax owed. There is no wash-sale problem because the rule applies only to losses.
- Map every holding to the right account type. Bonds and REITs into tax-deferred, broad equity into taxable, highest-growth into Roth.
- Turn off dividend reinvestment in taxable accounts. Or at least in any position you might harvest.
- Check estimated year-end distributions. Before buying an active fund in a taxable account in the fourth quarter.
- Track your carryforward losses. They never expire and are worth planning around before you realize a large gain.
- Give appreciated shares, not cash. And consider bunching multiple years into a donor-advised fund.
- Use QCDs after 70.5. Up to $111,000 in 2026, and route it before you take the rest of your RMD.
- Project taxable income every November. That is when you still have time to harvest losses, harvest gains at 0%, or adjust withdrawals.
Federal figures change annually and state treatment varies, so confirm your own numbers with a tax professional before acting. Advisory services are offered through a registered investment adviser, and this page is educational only.
Sources & further reading
- IRS — Rev. Proc. 2025-32 (2026 capital gains and QBI thresholds)
- IRS — 2026 tax inflation adjustments including OBBBA amendments
- Congressional Research Service — Qualified charitable distributions from IRAs
- CMS — 2026 Medicare premiums and IRMAA income tiers
- IRS — Retirement topics: required minimum distributions
- IRS — 2026 contribution limits for 401(k) and IRA accounts