Tax-loss harvesting and the loss bank: using every loss you own against a big sale

How it works

A big sale creates gain. Losses you already own can absorb it. Hans calls the total your loss bank, and it has three drawers:

1. Capital losses. Losses realized this year plus carryforwards from prior years. Individuals deduct capital losses against capital gains in full, plus up to $3,000 of other income ($1,500 if married filing separately) (IRC 1211(b)). Unused losses carry forward indefinitely and keep their short-term or long-term character (IRC 1212(b)).
2. Suspended passive losses. Rental and passive business losses you could not deduct in earlier years. When you sell your entire interest in the activity in a fully taxable sale to an unrelated buyer, they are released (IRC 469(g)).
3. Section 1231 losses. Losses on business property held over a year net against Section 1231 gains in the same year (IRC 1231).

Find drawer 1 on the capital loss carryover worksheet and Schedule D of last year's return, and drawer 2 on last year's Form 8582. Then estimate the sale with the Big Sale Tax estimator.

Capital losses: netting order and harvesting in the sale year

Losses meet gains inside Schedule D. A net short-term loss and a long-term carryforward reduce the 28% group first, then unrecaptured Section 1250 gain (taxed at up to 25%), then gain taxed at 0%, 15% or 20% (IRC 1(h)). For a rental, that means banked losses tend to hit the highest-taxed layer of real estate gain first.

Harvesting means realizing a loss on purpose in the sale year, typically by selling an investment that is worth less than its basis. Two timing points matter:

• Same year as the gain. A loss realized in the year the gain is recognized offsets it that year. A loss realized later carries forward and offsets later gain.
• Installment sales. With a Section 453 sale, gain is recognized as payments arrive, so a loss bank can be used up across several years. If your bank exceeds the whole gain, electing out of the installment method (IRC 453(d)) may make more sense. See electing out.

Capital losses cannot touch Section 1245 depreciation recapture beyond the $3,000 allowance, because recapture is ordinary income, and on an installment sale it is all taxed in the year of sale (IRC 453(i)).

The wash sale rule

A loss on stock or securities is disallowed if you buy substantially identical stock or securities, or a contract or option to buy them, within 30 days before or after the sale (IRC 1091(a)). The disallowed loss is added to the basis of the new shares. Purchases by your spouse or a corporation you control count (IRS Publication 550), and a purchase inside your IRA or Roth IRA makes the loss disappear for good, with no basis added (Rev. Rul. 2008-5).

Section 1091 by its terms covers stock and securities. As of October 2026, Congress has not extended it to cryptocurrency held directly, though bills to do so keep appearing; exchange-traded products that hold crypto are securities. What counts as substantially identical is a facts question the statute does not define. Your investment adviser and your CPA handle the security-level decisions; this page covers only the tax rules.

Suspended passive losses: the Form 8582 release

On a full taxable disposition of a passive activity to an unrelated party, the activity's current and prior-year losses are first used against that activity's own income and gain, including the gain on the sale, then against net income from other passive activities, and any excess is treated as nonpassive, so it can offset wages, interest and portfolio gain (IRC 469(g)(1)(A); Form 8582 instructions).

• Installment sale: the losses are released each year in proportion to gain recognized that year over total gross profit (IRC 469(g)(3)).
• No release: a 1031 exchange, a sale to a related party, or selling one building out of a grouped activity.
• At death: suspended losses are deductible only to the extent they exceed the basis step-up (IRC 469(g)(2)).

Section 1231 netting and the 5-year lookback

Gains and losses on business real estate and equipment held more than a year are netted each year. A net 1231 gain is treated as long-term capital gain; a net 1231 loss is ordinary. The catch: net 1231 gain is taxed as ordinary income to the extent of net 1231 losses deducted in the prior 5 years (IRC 1231(c)). If you deducted a 1231 loss in the last 5 years, part of this year's sale gain may be ordinary. If you plan to sell other business property at a loss, selling it in the same year as the big gain nets it against capital-gain-rate income; selling it in a separate year gives an ordinary loss but restarts the lookback for later gains.

Who it fits, and who it does not

Good fit: sellers with a carryforward from a past market drop or a failed venture; investors whose taxable account holds positions below basis; rental owners with years of suspended losses selling the whole activity to an unrelated buyer.

Limited fit: sellers whose gain is mostly Section 1245 recapture or other ordinary income; sellers whose only losses sit inside IRAs or 401(k)s, which do not count; sellers doing a 1031 exchange, which defers the gain and leaves passive losses suspended.

Worked example

Assumptions (illustrative): married couple filing jointly, $150,000 of other income, 2026 tables. Taxes from the sale computed with the Big Sale Tax engine (federal income tax plus 3.8% net investment income tax, plus state where shown).

A rental sale with $800,000 of long-term gain and $200,000 of unrecaptured Section 1250 gain produces $236,113 of tax in Texas with no released losses, and $145,040 when $250,000 of suspended passive losses are released in the same year.

IRS stance and audit risk

Harvesting real losses is ordinary tax compliance, not a reportable or listed transaction. The IRS polices wash sales (brokers report disallowed losses on Form 1099-B, but not across accounts or spouses), related-party sales, which do not produce deductible losses (IRC 267) or release passive losses, and sham trades with no economic change. Keep records of carryforwards year to year; the IRS can examine the origin of a carryforward when it is used.

Costs and fees

Costs are trading costs, any advisory or management fees for a harvesting program, and the drift of holding a replacement investment instead of the one sold. There is no fee to use a carryforward you already have.

How it compares with a Section 453 installment sale

Loss harvesting offsets gain permanently; an installment sale spreads it. They pair well: when the loss bank covers only part of the gain, a seller note can match the remaining gain to years when new losses or lower income are available, and passive losses release in step with the payments. When the bank covers all of the gain, a cash sale may be simpler. The Big Sale Tax Analysis runs both.

Frequently asked questions