Capital Gains and Tax-Loss Harvesting

How capital gains are taxed

• Short-term (held ≤1 year): taxed at ordinary income rates
• Long-term (held >1 year): preferred rates of 0%, 15%, or 20% depending on income
• Net investment income tax (NIIT) of 3.8% may apply on top for higher earners
• State tax usually treats all gains as ordinary income — model both layers

Tax-loss harvesting mechanics

Selling a losing position generates a capital loss that first offsets capital gains of the same character (short vs. long), then offsets the other character, and finally up to $3,000 of ordinary income per year. Unused losses carry forward indefinitely.

• Net short-term losses against short-term gains first (best because they offset higher-taxed gains)
• Then net against long-term gains
• Excess loss: up to $3,000 against ordinary income each year
• Carryforward what you can't use — it doesn't expire

The wash-sale rule

If you sell at a loss and buy a substantially identical security within 30 days before or after, the loss is disallowed and added to the basis of the replacement shares. The 30-day window applies across all your accounts — including IRAs and a spouse's account.

• Wait 31 days before repurchasing the exact same security
• Or rotate into a similar-but-not-identical fund (e.g., S&P 500 ETF → total-market ETF)
• Watch automatic dividend reinvestment in IRAs — it can silently trigger a wash sale

Year-end execution

• Run a realized + unrealized gain/loss report in late November
• Place trades early enough to settle in the current tax year (typically the last few business days)
• Coordinate with any planned Roth conversions, RMDs, or stock comp vesting
• Track basis carefully — broker 1099-Bs occasionally miss adjustments