Not Every Loss Has the Same Tax Value: Which Ones to Realize First

Two investments can show the same paper loss and still produce very different tax results. The IRS netting rules that determine which loss matters most depend on details many investors overlook before selling.

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Imagine two losing holdings in a brokerage account, each down $10,000. Sell either one and the brokerage statement shows the same loss. But the tax return can tell a very different story.

Take a single retiree whose taxable income puts her in the 24% bracket. If a short-term loss offsets short-term gains, she could save $2,400. If an equally large long-term loss offsets long-term gains taxed at 15%, the savings would be $1,500. That $900 difference comes entirely from the IRS netting rules.

Holding Period Determines the Tax Treatment

Per IRS Publication 550, an asset held for one year or less produces a short-term gain or loss. Hold it longer than a year and it becomes long-term, with the clock starting the day after purchase and the sale date counting as well.

Short-term gains are taxed like wages, at ordinary income rates that range from 10% to 37%. Long-term gains qualify for lower capital gains rates, which Publication 550 lists as 0%, 15%, 20%, 25%, and 28%; the higher two apply to special categories such as collectibles. Most stock gains fall into the first three brackets.

The IRS Netting Sequence Determines Each Loss’s Value

Before anything affects your tax bill, the IRS requires losses to be sorted into two buckets. First, all short-term gains and losses are combined, along with any short-term capital loss carryover, to reach one net result. The same is then done for long-term gains and losses, including mutual fund capital gain distributions and long-term carryovers.

Only after that do the two categories offset one another. A net loss in one category can reduce a net gain in the other. Publication 550 defines net capital gain as the amount by which net long-term capital gain for the year exceeds your net short-term capital loss.

If losses still exceed gains after the crossover, up to $3,000 a year, or $1,500 if married filing separately, can offset ordinary income. Since a loss saves the rate that applied to the gain it cancels, a short-term loss matched against short-term gains usually does the most work.

There is also a Medicare-related benefit: losses that reduce gains can lower income used to determine the premium surcharge known as IRMAA. For 2026 premiums, that surcharge begins above $109,000 for single taxpayers and $218,000 for joint filers.

Unused Losses Retain Their Short-Term or Long-Term Character

Any capital losses you cannot use right away are carried forward, and Publication 550 says they keep their original short-term or long-term label. A long-term capital loss carryover reduces long-term gains in the next year before it affects short-term gains.

That can matter for planning. A large long-term carryover will first absorb long-term gains, and those are generally the least expensive gains to realize. If you expect to sell recent winners in the next tax year, a short-term carryover is usually the more useful one to preserve.

Which Loss Positions to Sell First

1. Losses nearing the one-year mark. A position bought 11 months ago at a loss still counts as short-term. If you also have short-term gains, selling before the anniversary preserves the better short-term offset.
2. Highest-cost lots. These are selected through specific identification. Publication 550 allows you to choose which shares you sell if you tell your broker or other agent which stock to sell at the time of sale and receive written confirmation within a reasonable period. If you do not do that, the IRS treats the earliest acquired shares as sold first, and those are often your oldest, lowest-cost shares with the smallest loss.
3. Positions you would be willing to replace. If you buy substantially identical stock within 30 days of the sale, the wash sale rule disallows the loss and adds it to the basis of the replacement shares. The original holding period also carries over.

When a Long-Term Loss Offers No Immediate Benefit

The 2025 Publication 550 table applies a 0% rate to long-term gains while taxable income is at or below $48,350 for single taxpayers, $64,750 for heads of household, and $96,700 for married couples filing jointly. Those income thresholds are adjusted for inflation each year, so the current figures should be checked before selling.

A retired couple below those thresholds already owes nothing on long-term gains. If they realize a long-term loss in that year, netting rules force the loss to offset gains that would not have been taxed anyway. The loss is more valuable if saved for a year with short-term gains or higher income, especially because state income taxes follow separate rules and a year with 0% federal tax may still trigger a state tax bill.

A Four-Step Approach to Choosing Which Losses to Harvest

Start with short-term losses against short-term gains. Sell short-term losers before they become long-term. Use specific identification to choose the highest-cost lots and make sure you get written broker confirmation. Save long-term losses for last, and use them only when long-term gains are above the 0% threshold.

When gains, carryovers, and Medicare thresholds all fall in the same tax year, it is wise to run the numbers with a CPA or fiduciary advisor before placing trades.