How tax-loss harvesting works on a tax return

An infographic fit for a business card, not tax advice.

T3 Technology Tools for Today is next week. I'm getting my business cards ready.

Pictured: Roughly what's happening on a tax return when someone tax-loss harvests and realizes capital gains.

1. Net the long-term capital gains and losses (add long-term carryforward losses)

2. Net the short-term capital gains and losses (add short-term carryforward losses)

3. “Combine” (See Schedule D) the net long-term and net short-term gain or loss

4. Offset up to $3,000 (if MFJ, as of 2025) of ordinary income

5. Carryover excess losses (noting the holding period) to future tax years

Note: Carryover losses retain their holding period (short vs. long term), although this isn't explicitly viewable on Form 1040 (though it is viewable on Schedule D).

This results in the following scenarios (assuming net loss):

1. Net long-term loss offsets ordinary income → Best case. You’re taking a "weak" tax asset (long-term loss) and applying it against highly-taxed income.

2. Net short-term loss offsets ordinary income → Also a great use. Short-term losses are valuable, and using them to offset ordinary income helps.

3. Net long-term loss offsets net short-term gain → Converts a weak tax asset (long-term loss) into a strong tax benefit (offsetting high-tax short-term gains).

4. Short-term loss offsets short-term gain → Good, since short-term gains are heavily taxed.

5. Long-term loss offsets long-term gain → Weak use. Long-term gains are already lightly taxed (depending on circumstances).

6. Net short-term loss offsets net long-term gain →Weakest use since wastes a valuable tax asset (net short-term loss) on relatively lightly taxed net long-term gain.

Note: This is NOT tax advice. This material is educational and illustrative, and readers should consult a licensed tax professional, which I am not.

“Just picked them up from the printer yesterday”

Thanks for reading.