Historically, summer is a quieter period for trading as market volumes slow down. But 2026 is breaking the rules. With recent tech-sector rotations and unexpected volatility shaking portfolios, putting your investments on autopilot right now could be a costly mistake.
In fact, research shows that 86% of financial advisors ramp up tax management strategies during volatile periods, rather than waiting for a particular season, like year-end.
And one of those employed strategies is tax-loss harvesting — selling underperforming investments to offset capital gains, or even ordinary income. Not only does this practice lock in paper losses early, but it positions your portfolio for tax advantages before filing season arrives.
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Here’s how to target the right assets to turn your tax losses into a potentially lower federal income tax bill.
This article does not cover state income tax and is for educational purposes only. The content does not constitute financial, legal, or tax advice. Consult a certified financial advisor before making trading decisions based on your individual tax situation.
Why market dips are the strategic time to harvest
Tax-loss harvesting means selling losing investments in taxable accounts to lower the capital gains tax you owe on your winning ones. By taking advantage of this strategy during market dips, you gain three strategic advantages:
- Capturing market dips before they disappear. Selling during dips locks in tax offsets before potential year-end rallies erase your paper losses.
- Avoiding the year-end rush. Executing trades in late November or December (or other times of the year where tax planning is “trending”) comes with liquidity pinches, trade execution delays, and wider bid-ask spreads as everyone rushes to rebalance at once. Selling losses as they occur can help avoid all that.
- Proactive portfolio rebalancing. Reviewing your holdings periodically throughout the year gives you breathing room to realign your asset allocation and see trends like asset class drift, sector overconcentration, or performance divergence before they expose you to unintended market risks.
Identifying your tax harvesting targets
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But, of course, you don’t want just to sell an investment because it’s underperforming. Otherwise, you could lose out on savings that would bring more benefit than tax-loss harvesting might (more on that below).
Review your portfolio for these key indicators that an investment might be a good candidate for tax-loss harvesting:
- Focus only on taxable brokerage accounts. Tax-loss harvesting only applies to taxable brokerage accounts where you buy stocks, bonds, mutual funds, or ETFs. Tax-advantaged accounts like IRAs, Roth IRAs, and 401(k)s are ineligible.
- Target assets below cost basis. Focus on positions trading noticeably below what you originally paid for them to generate the most usable realized losses. When placing your sell orders, ensure your brokerage uses “specific identification” or “highest-in, first-out” (HIFO) lot selection so you can sell your specific underwater shares instead of triggering default “first-in, first-out” (FIFO) rules on older, more profitable shares.
- Look for temporary displacements. Identify high-quality assets that have decoupled from their long-term fundamentals during volatility swings.
For instance, in the summer of 2026, the tech sector saw a global sell-off as investors grew increasingly anxious that AI investments were outstripping immediate revenue returns. This anxiety impacted Nvidia (NVDA), Advanced Micro Devices (AMD), and Alphabet (GOOGL) stocks.
For more information on up-to-date stock news, check out Kiplinger’s reporting on Stocks: News, Features and Analysis.
How tax savings actually add up: Tax-loss benefits
Selling an asset at a loss in a taxable account gives you a potentially powerful tool to lower your overall tax burden at year-end. This happens across three tiers:
- Offset capital gains dollar-for-dollar. Your losses directly cancel out capital gains realized from winning stock sales or real estate. So, if you made $10,000 in profits earlier this year, $10,000 in harvested losses brings your federal taxable capital gain to $0.
- Deduct up to $3,000 against ordinary income. If your total capital losses exceed your capital gains for the year, you can deduct up to $3,000 ($1,500 if married filing separately) of the excess against ordinary income, like wages or retirement distributions.
- Carry forward the excess indefinitely. Do you have more than $3,000 in net losses with no other gains to net them against? No worries. Unused capital losses don’t expire. So you can carry them forward into 2027, 2028, and beyond to offset future gains.
A quick note on “asset matching”: The IRS first offsets short-term gains (taxed at higher ordinary-income rates) and short-term losses. Long-term gains are first matched with long-term losses. Any leftover losses then “cross over” and offset capital gains of the opposite type before carrying over against ordinary income. Keep this in mind when practicing tax-loss harvesting.
Examples: when tax-loss harvesting can lower your tax bill
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How does tax-loss harvesting benefit other items on your tax bill? Here are a couple of examples:
- If you’re subject to the highest tax rate on capital gains (20%), you can potentially avoid that tax through tax-loss harvesting, resulting in valuable savings. Those savings can be reinvested in securities or used to help rebalance your portfolio. (Note: If your income falls into the 0% long-term capital gains tax rate, harvesting long-term losses might not offer immediate savings, as your gains are already tax-free.)
- By deducting up to $3,000 of capital losses against ordinary income, you can save on taxes typically levied on retirement plan distributions, pensions, and other ordinary income sources. An unlimited amount of capital loss might be carried forward to offset gains you anticipate from real estate sales, mutual funds, ETFs, etc.
But don’t forget: While the top federal capital gains rate is 20%, there’s a net investment income tax (NIIT) that may apply an extra 3.8% on top of that, bringing the total federal rate to 23.8% for some high-income earners.
Navigating the IRS wash sale rule
Before executing trades for tax-loss harvesting, you must navigate the IRS “wash sale” rule.
The rule: If you sell a security at a loss and buy a “substantially identical” security within a 61-day window (30 days before, the day of, or 30 days after the sale), you cannot claim the loss on your current-year tax return. Instead, the loss is deferred — the disallowed amount is added to the cost basis of the new shares, which adjusts your future tax obligation when you eventually sell them.*
This means that, if you want to preserve your target market exposure (without breaking IRS rules), you might:
- Switch to a non-identical replacement. Reinvest sale proceeds into a similar (but not substantially identical) asset. For example, swapping a tech ETF tracking the S&P 500 Information Technology Index for one tracking the MSCI USA IMI Technology Index.
- Try the “double-up” strategy. Buy a matching block of the same security today using available cash. Hold both positions for at least 31 calendar days (so the original purchase falls outside the 30-day pre-sale window), and then sell the original, underwater lot to harvest the loss. (Keep in mind this temporarily doubles your exposure to that investment for 31 days and carries additional market downside risk.)
(Image credit: Getty Images)
You should also watch out for other, “hidden” wash sale tax traps, like:
- Automatic Dividend Reinvestment (DRIP). Some portfolios are set up so that dividends are automatically reinvested in the harvested stock or fund during the 61-day window. If a dividend automatically reinvests, that could trigger the wash sale rule.
- The IRA wash sale trigger. While IRAs and Roth IRAs are disallowed from claiming a tax-loss harvest, they can accidentally trigger the wash sale rule if one of them buys back a harvested asset inside the 61-day window. Because retirement accounts don’t track cost-basis adjustments, this can permanently eliminate your potential tax deduction rather than just deferring it.
Your financial advisor may have other strategies. But whichever you choose, ensure you account for trading fees or bid-ask spreads (the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to sell). You don’t want these costs to outweigh the savings you generate through tax-loss harvesting.
*Note: The rule applies across all accounts you or your spouse own.
What you can do now
If you’re ready to turn current or future market volatility into tax savings, follow this summary checklist:
- Audit year-to-date gains. Tally up any capital gains you’ve already realized in 2026.
- Scan taxable accounts. Locate positions affected by recent rotations that are trading below cost basis.
- Analyze the impact of a sale. If you were to sell the chosen investment, how would you utilize the cash proceeds? How much would brokerage fees eat into your profit margin? Be sure you know the answer to these (and other) applicable questions before making any trades.
- Execute and swap. Sell chosen losing positions and immediately deploy your capital into suitable, non-identical replacement assets or another strategy. Remember to pause any automatic DRIP reinvestment plans on that security.
- Document everything. Maintain clean trade receipts and cost-basis logs to help streamline your income tax preparation come spring.
Market volatility is inevitable, but paying unnecessary taxes isn’t. By taking a proactive, year-long approach rather than reacting in December, you can transform short-term paper losses into immediate tax savings — freeing up capital to stay invested and compound over time.
So use an hour this week to review your portfolio, consult your tax advisor, and make the next market dip work for you.
