Tax-Loss Harvesting for Business Owners: Capital Gains Strategies and Wash Sale Rules

By Yarik Yarosh, CPA ·September 5, 2026 ·Updated September 23, 2026 ·9 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

Tax-loss harvesting is one of the most accessible year-end tax planning strategies, and it’s especially valuable for business owners who have capital gains from selling business assets, investment properties, or personal portfolios. The core concept: sell investments that are currently at a loss to realize the loss for tax purposes, then use those losses to offset capital gains. Net capital losses exceeding capital gains can offset up to $3,000 of ordinary income per year ($1,500 for married filing separately), with the remainder carrying forward indefinitely. The constraint is the wash sale rule under IRC 1091: if you sell a security at a loss and purchase “substantially identical” securities within 30 days before or after the sale, the loss is disallowed and added to the basis of the new shares. This creates a 61-day window (30 days before + sale date + 30 days after) during which you can’t repurchase the same or substantially identical investment without losing the tax benefit.

✓Key takeaway

Capital gains and losses netting rules:

Step	Rule
1. Net short-term gains and losses	STCG and STCL offset each other
2. Net long-term gains and losses	LTCG and LTCL offset each other
3. Net the two groups	If both are gains, taxed at their respective rates; if one is a net loss, it offsets the other
4. Net capital loss deduction	Up to $3,000/year against ordinary income ($1,500 MFS)
5. Excess losses	Carry forward indefinitely, retaining their character (short-term or long-term)

Tax rates on capital gains (2025):

Type	Rate
Short-term capital gains	Ordinary income rates (10%-37%)
Long-term capital gains (held >1 year)	0% ($0-$48,350 single), 15% ($48,351-$533,400), 20% ($533,401+)
Net investment income tax (NIIT)	Additional 3.8% if MAGI exceeds $200K/$250K
Collectibles (art, coins, precious metals)	28% maximum
Unrecaptured Section 1250 (real estate depreciation)	25% maximum

Wash sale rule (IRC 1091):

Element	Rule
Prohibited window	30 days before to 30 days after the sale (61-day window)
“Substantially identical”	Same stock, same mutual fund, same ETF tracking the same index (unclear for similar but not identical ETFs)
Effect of violation	Loss is disallowed; disallowed loss is added to the basis of the replacement shares
Applies to	Stocks, bonds, options, mutual funds; the statute doesn’t mention cryptocurrency, the IRS treats crypto as property, and it has issued no rules or guidance applying the wash sale rule to it
Across accounts	Wash sale rule applies across ALL accounts (taxable, IRA, spouse’s accounts per case law)

How does tax-loss harvesting work in practice?

Hypothetical example

Round numbers. For current guidance, see IRS Topic 409 (Capital Gains and Losses). A business owner, single, 35% bracket, has the following investment portfolio and capital events in 2025:

Capital gains realized:

Source	Gain Type	Amount
Sale of rental property	LTCG (Section 1231)	$200,000
Unrecaptured Section 1250 gain on rental	Long-term, taxed at up to 25% (rental building is Section 1250 property)	$80,000
Stock portfolio gains (LTCG)	LTCG	$50,000
Total gains		$330,000

Tax without harvesting:

Gain	Rate	Tax
Rental LTCG ($200,000)	20% + 3.8% NIIT	$47,600
Unrecaptured 1250 gain ($80,000)	25% (max)	$20,000
Stock LTCG ($50,000)	20% + 3.8% NIIT	$11,900
Total capital gains tax		$79,500

Available losses to harvest:

Investment	Current Value	Cost Basis	Unrealized Loss
Large-cap stock fund (down)	$120,000	$160,000	($40,000)
International stock fund (down)	$60,000	$85,000	($25,000)
Individual stock (tech, down)	$30,000	$55,000	($25,000)
Bond fund (down due to rising rates)	$90,000	$100,000	($10,000)
Total harvestable losses			($100,000)

Tax with harvesting all $100,000 in losses:

Gain	Losses Applied	Net Gain	Tax
Rental LTCG ($200,000)	($100,000)	$100,000	$23,800
Unrecaptured 1250 gain ($80,000)	$0 (losses applied to LTCG first)	$80,000	$20,000
Stock LTCG ($50,000)	$0	$50,000	$11,900
Total tax			$55,700

Capital losses offset capital gains in a specific order:

Correct netting:

Step	Calculation
1. Net LTCG: $200,000 + $50,000 = $250,000
2. Net LTCL from harvesting: ($100,000)	All harvested losses are long-term (held >1 year)
3. Net LTCG after losses: $150,000
4. Tax on net LTCG ($150,000 x 23.8%)	$35,700
5. Unrecaptured 1250 gain (long-term gain taxed at up to 25%; the harvested losses were absorbed by the other long-term gain)	$20,000
Total tax	$55,700

Savings from harvesting:

Metric	Without Harvesting	With Harvesting	Savings
Capital gains tax	$79,500	$55,700	$23,800

What to do with the proceeds (avoiding wash sales):

Sold	Replace With (Not Substantially Identical)	Wait Period
Large-cap stock fund (Vanguard S&P 500)	Large-cap fund from different provider or total market fund	Can buy immediately if not substantially identical
International stock fund (Vanguard FTSE)	Different international fund (iShares MSCI EAFE)	Immediate if different index
Individual tech stock (e.g., specific company)	Different company in same sector, or sector ETF	31+ days to repurchase same stock
Bond fund (Vanguard Total Bond)	Different duration or type bond fund	Can buy immediately if not substantially identical

Year-end vs. year-round harvesting:

Timing	Advantage
Year-end (December)	Can see total gains for the year and harvest to match
Year-round (continuous)	Captures losses when they occur (markets can recover before year-end)
Automated (robo-advisors, direct indexing)	Daily monitoring for harvest opportunities

The Section 1231 lookback trap: If the business owner has Section 1231 losses in the current or prior 5 years, the Section 1231 gain from the rental sale may be recharacterized as ordinary income (not LTCG):

Prior 5 Years Section 1231	Current Year 1231 Gain Treatment
No unrecaptured 1231 losses	LTCG (favorable 23.8%)
$50,000 of prior 1231 losses	First $50,000 of 1231 gain = ordinary income (37%); remainder = LTCG

This lookback can increase the current year tax by reclassifying favorable LTCG as unfavorable ordinary income.

Cryptocurrency harvesting (no wash sale rule, currently):

Asset	Current Wash Sale Treatment
Stocks, bonds, mutual funds, ETFs	Wash sale rule applies (IRC 1091)
Cryptocurrency	Not expressly covered (section 1091 covers stock and securities; the IRS has issued no rules or guidance on digital assets), but a pending bill, H.R. 10357, would apply the rule to traded digital assets sold after the bill’s introduction if enacted
Strategy	Sell crypto at a loss, immediately repurchase the same crypto, and claim the loss

This is a significant advantage for crypto investors, but the window may close if Congress extends the wash sale rule to digital assets, and the pending bill, if enacted, would apply to sales made after the date it was introduced.

When NOT to harvest:

Situation	Why Not
In a low tax bracket this year	Losses are more valuable in higher-bracket years
Expecting step-up in basis at death	Unrealized losses disappear at death (stepped-up basis); better to hold
Transaction costs are high	Frequent trading costs may exceed tax savings
Portfolio disruption is significant	Changing allocation to avoid wash sales may create unintended risk exposure
Short-term vs. long-term character mismatch	Harvesting long-term losses to offset short-term gains wastes the rate differential

Illustrative numbers only, not a real client and not advice for your facts.

Can I spread the gain from a business sale over multiple years?

If the buyer pays in installments, you can report the gain proportionally under IRC 453 as you receive each payment. The installment method applies automatically to any sale where at least one payment is received after the tax year of the sale. Each payment consists of three components: return of basis (tax-free), gain (taxed at capital gains rates), and interest income (taxed as ordinary income). Dealer dispositions, sales of inventory, and sales of depreciable property to a related party don’t qualify for installment treatment. If you elect out of the installment method (by reporting the full gain in the year of sale), you cannot reverse that election without IRS consent.

Can I offset capital gains with capital losses from other investments?

Yes. Capital losses first offset capital gains of the same type (short-term losses against short-term gains, long-term against long-term), then any remaining net loss offsets gains of the other type. If net capital losses exceed capital gains, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately). Unused losses carry forward indefinitely to future tax years, maintaining their character (short-term or long-term). The wash sale rule (IRC 1091) prevents you from claiming a loss if you repurchase substantially identical securities within 30 days before or after the sale. Tax-loss harvesting before year-end is a common strategy to realize losses that offset gains elsewhere in the portfolio.

Why does the holding period matter when harvesting losses?

Because short-term and long-term results are taxed very differently. Net short-term gain is taxed at ordinary rates, up to 37% for 2025 and 2026, while long-term gain on assets held more than one year is taxed at 0%, 15% or 20%. A loss you can’t use this year carries forward and keeps its short-term or long-term character, so what you sell shapes what it offsets later.

The holding period starts the day after you buy and includes the day you sell, so a position bought January 15 is short-term if sold January 15 of the next year and long-term from January 16. The $3,000 limit on losses against other income ($1,500 married filing separately) isn’t indexed. The wash sale rule in section 1091 applies to stock and securities; the statute doesn’t mention digital assets, and the IRS treats crypto as property.

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Cite this page

Yarik Yarosh, CPA. "Tax-Loss Harvesting for Business Owners: Capital Gains Strategies and Wash Sale Rules." Blue Cloud CPA, September 5, 2026, updated September 23, 2026. https://bluecloudcpa.com/guides/small-business-tax-loss-harvesting-capital-gains-strategies

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.