Tax-loss harvesting is selling an investment at a loss on purpose, to offset gains (or a slice of your ordinary income) on your tax return. It only applies to taxable brokerage accounts — a loss inside an IRA or 401(k) doesn’t get you anything on your taxes, since those accounts aren’t taxed on gains or losses in the first place.
Not tax advice: Tax-loss harvesting touches your specific tax situation, other income, and filing status. This covers how the mechanics work; talk to a tax professional before acting on it.
How Tax-Loss Harvesting Works
You sell a position that’s down from what you paid for it, which realizes a capital loss. That loss first offsets capital gains of the same type (short-term losses against short-term gains, long-term against long-term), then gains of the other type if there’s any left over.
If your losses exceed your gains for the year, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if you’re married filing separately). Anything beyond that doesn’t disappear — it carries forward to future tax years indefinitely.
The Wash-Sale Rule
The catch: if you buy the same or a “substantially identical” security within 30 days before or after the sale that created the loss, the IRS disallows the loss under the wash-sale rule. That’s a 61-day window total — the 30 days before, the sale date itself, and the 30 days after.
In a normal taxable account, a disallowed wash-sale loss isn’t gone for good: it gets added to the cost basis of the replacement shares, which effectively defers the benefit rather than eliminating it. We cover this in more detail, including how it shows up on your Fidelity statements, in our guide to Fidelity’s “wash sale disallowed loss” and how to get around or remove a wash sale.
There’s an important exception: if you sell at a loss in a taxable account and buy a substantially identical security in an IRA or Roth IRA within the window, the loss is disallowed and the basis in the IRA is not increased — the loss is forfeited entirely, not deferred, per IRS Revenue Ruling 2008-5. Watch this especially if you hold similar funds across both a Fidelity brokerage account and a Fidelity IRA.
What Counts as “Substantially Identical”?
The IRS doesn’t publish a precise checklist here — it determines this case by case. Selling a stock and buying it back is an obvious wash sale; selling one company’s stock and buying a broad sector or index fund generally is not, since a fund holds many securities and isn’t identical to any single one. Swapping between two similar ETFs or mutual funds (say, two S&P 500 index funds from different providers) sits in a grayer area, since the IRS hasn’t drawn a bright line on how similar is too similar.
A common approach is to harvest the loss and temporarily move into something correlated but not identical — a different index or sector fund — rather than sitting in cash or buying back the exact same holding.
Does Fidelity Automate Tax-Loss Harvesting?
For self-directed brokerage accounts, no — you have to identify and execute the trades yourself. Fidelity does offer it automatically on one specific product: once your balance in a Fidelity Go taxable account reaches $25,000, Fidelity says tax-loss harvesting is “automatically included” and it looks for opportunities in your account’s underlying Flex Funds throughout the year. That’s specific to Fidelity Go’s taxable accounts above that balance threshold — it doesn’t apply to a regular self-directed brokerage account or to Fidelity Wealth Services unless your advisor does it manually.
How to Find Losses to Harvest on Fidelity
Your account’s Gain/Loss page (under Accounts & Trade) shows unrealized gains and losses by position, sorted by short-term vs. long-term. If that column looks wrong or empty after moving money between accounts, that’s usually a cost-basis transfer issue rather than an actual data loss — see our guide on Fidelity’s missing gain/loss column after an account transfer.
Common Mistakes
- Harvesting losses inside an IRA or 401(k) — there’s no tax benefit since those accounts aren’t taxed on gains or losses.
- Buying back the same security (or a near-identical fund) inside 30 days and triggering a wash sale.
- Repurchasing a similar position in an IRA after harvesting a loss in a taxable account — this permanently forfeits the loss rather than just deferring it.
- Ignoring the short-term/long-term ordering rules when estimating how much a harvested loss will actually offset.
- Harvesting losses late in December without accounting for settlement time, and missing the window before year-end.
Frequently Asked Questions
Does tax-loss harvesting work in a Fidelity 401(k) or IRA?
No. Gains and losses inside tax-advantaged accounts like a 401(k), traditional IRA, or Roth IRA aren’t reported to the IRS, so there’s no capital loss to harvest there. Tax-loss harvesting only applies to taxable brokerage accounts.
What counts as a “substantially identical” security for the wash-sale rule?
The IRS doesn’t give a precise list and decides case by case. Buying back the exact same stock or fund is a clear violation; swapping into a different, broadly diversified fund is generally safer, but two very similar funds tracking the same index sit in a gray area.
Can I harvest a loss and buy back the exact same stock later?
Yes, once you’re outside the 61-day wash-sale window (30 days before the sale, the sale date, and 30 days after). Buying it back sooner than that disallows the loss.
Do unused capital losses expire?
No. Losses beyond what you can deduct in a given year ($3,000 against ordinary income, plus whatever offsets your gains) carry forward to future tax years indefinitely until used up.
Educational information, not tax or financial advice. Tax-loss harvesting depends on your full tax situation, filing status, and other income. Talk to a tax professional before acting on any of this.
Sources
- IRS, Topic No. 409, Capital Gains and Losses
- IRS, Publication 550, Investment Income and Expenses
- Fidelity, Wash-Sale Rules
- Fidelity Go, Investment Account FAQs