How to Do Tax-Loss Harvesting, Step by Step, for High-Income Families in California and Washington

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

To do tax-loss harvesting, you sell an investment in a taxable account that is worth less than you paid, use that realized loss to offset capital gains (and up to $3,000 a year of ordinary income), and put the cash into a similar but not substantially identical investment so you stay invested. The one rule that can undo it is the wash sale rule: if you, your spouse or your IRA buy substantially identical stock or securities within 30 days before or after the sale, the IRS disallows the loss. Everything else is bookkeeping and timing.

For a two-income household earning $750,000 to $3 million in California or Washington, the steps are the same as for anyone. What changes is the size of the benefit, and the number of ways a family with RSUs, ESPP purchases and several brokerage accounts can trip the wash sale rule without noticing.

Why harvested losses are worth more at your income level

A capital loss is worth whatever tax rate it removes. At this income, that rate is high on both sides of the ledger.

• Federal long-term gains: for 2026, married couples filing jointly pay 20% on long-term gains once taxable income passes $613,700 (IRS Rev. Proc. 2025-32).
• Federal short-term gains: taxed as ordinary income, which reaches 37% above $768,700 of taxable income for 2026 (same source).
• Net Investment Income Tax: an extra 3.8% on investment income once modified AGI is above $250,000 for joint filers (IRS). Nearly every family in this income range pays it.
• California: there is no lower rate for capital gains; all gains are taxed as ordinary income (FTB). For 2025 the joint rates run 10.3% to 12.3%, plus a 1% Behavioral Health Services Tax on taxable income over $1,000,000 (FTB 2025 schedules). FTB has not published 2026 brackets yet.
• Washington: no wage income tax in 2026, but a 7% tax on long-term capital gains above an annual standard deduction ($278,000 for 2025, the latest published), and 9.9% on taxable gains above $1,000,000 (WA DOR). Real estate and retirement accounts are exempt.

So a California family with taxable income over $1,000,000 can be looking at roughly 36% to 37% combined on a long-term gain (20% + 3.8% + 12.3% or 13.3%, depending on the California bracket) and over 50% on a short-term gain. A loss that cancels part of that gain is worth real money in the year you take it.

How to do tax-loss harvesting step by step

1. Find positions with an unrealized loss in taxable accounts only. Losses inside a 401(k), IRA or Roth IRA cannot be deducted. Look lot by lot, not just at the total position: a fund you bought over several years may show a gain overall while the lots bought near a peak are underwater.
2. Decide which lots to sell. Most brokerages let you choose specific lots instead of selling the oldest shares first. Pick the lots with the largest loss, and note whether each is short-term (held one year or less) or long-term (held more than one year) (IRS Topic 409).
3. Check the 61-day window before you sell. Look back 30 days and ahead 30 days for any purchase of the same or a substantially identical security in any account the rule covers: yours, your spouse’s, and your own IRA and Roth IRA (IRS Pub. 550, Wash Sales). Pub. 550 does not address purchases in your spouse’s IRA; many families check it too, to be safe. Turn off dividend reinvestment on that holding for the window.
4. Sell, and buy a similar but different replacement. The point is to keep your market exposure. Selling one S&P 500 index fund and buying a fund that tracks a different index (a total-market or large-cap index, for example) keeps you invested. The IRS says the test depends on “all the facts and circumstances”, so funds tracking the same index from different providers are a gray area many families choose to stay out of.
5. Wait at least 31 days before buying the original back, if you want it back. Many families simply keep the replacement.
6. Record it. Keep the trade confirmations, the lot detail, and the replacement chosen. Check the Form 1099-B the following year: brokers flag wash sales they can see within the same account, but not purchases in other accounts, such as your spouse’s account or your IRA.

Worked example: a $1.1 million household in California, and the same family in Seattle

Assumptions (illustrative): a married couple filing jointly, $1,150,000 of W-2 income from tech and biotech jobs, about $1,100,000 of taxable income before any investment sales, two children ages 4 and 8. In 2026 they sell vested company shares held for more than a year to reduce concentration, realizing a $200,000 long-term gain. Their taxable brokerage account also holds an index fund bought earlier in 2026 that is now down $60,000.

Two things stand out. First, in California the harvest is worth about half again as much, because the state taxes the gain at full ordinary rates. Second, in Washington the state tax only matters once a family’s long-term gains for the year exceed the standard deduction. A Seattle family that sells $600,000 of long-term gains in one year would owe the 7% on the part above the deduction, and a harvested long-term loss could reduce that too. Washington is also adding a 9.9% income tax on AGI over $1,000,000 starting in 2028 (WA DOR); how it will treat capital losses is still waiting on DOR guidance.

If the family had no gains at all, the loss could offset only $3,000 of ordinary income a year, with the rest carried forward to later years (IRS Topic 409). California uses the same $3,000 limit (FTB Schedule D (540) instructions, 2025). At a 37% federal bracket, $3,000 is worth about $1,110 a year federally. Carried-forward losses are more useful when a large sale is coming, such as diversifying a concentrated RSU position.

It is mostly a deferral, so be clear about what you gain

Selling at a loss and buying a replacement lowers your cost basis. The $60,000 in the example is not gone; it shows up as a larger gain when the replacement is eventually sold. The harvest pays off in three ways:

• Time value. Tax you would have paid this year stays invested, possibly for decades.
• Rate difference. A loss used against a short-term gain removes tax at ordinary rates, while the later gain on the replacement may be long-term and taxed at a lower federal rate. (California taxes both the same.)
• Planned uses of low-basis shares. Shares you never sell, or give to charity, may never produce that deferred gain. This depends on estate and giving plans, so it belongs in the family’s wider plan, not in a year-end trade.

Wash sale traps specific to RSUs, ESPPs and two-account households

The wash sale rule is where high-income W-2 families most often lose a harvested loss. The traps are rarely in the trade itself.

• A new RSU vest within 30 days. IRS Publication 550 gives a close example: an employee who sells stock received as a bonus award at a loss, and receives another award of substantially identical stock within 30 days of the sale, cannot deduct the loss (Pub. 550). An RSU vest delivers shares in the same way. If your company vests quarterly, selling company shares at a loss usually means timing the sale to fall more than 30 days from any vest.
• ESPP purchases. An ESPP purchase is a purchase of the same stock. Selling company shares at a loss within 30 days of a purchase date can create a wash sale.
• Your spouse’s account. A purchase by your spouse counts as yours (Pub. 550). Couples with separate brokerage accounts, or separate advisers, are the most likely to trip this.
• Your IRA or Roth IRA. Buying the same security in your IRA within the window triggers a wash sale (Rev. Rul. 2008-5). Worse, unlike an ordinary wash sale, the disallowed loss is not added to the basis of the IRA shares, so it is generally lost for good. This includes backdoor Roth IRAs funded in the same weeks.
• Automatic purchases. Dividend reinvestment, scheduled monthly investments and robo-advisor rebalancing can all buy back the position without anyone placing an order.

When a wash sale does happen in a taxable account, the loss is not lost. It is added to the cost of the new shares, and their holding period includes the old shares’ holding period (Pub. 550). The deduction just moves to a later year.

When harvesting is not worth doing

• The replacement would change your plan. Do not sell a diversified fund and buy something riskier just to have a replacement.
• The loss is small relative to trading costs and paperwork. A $1,500 loss is rarely worth a wash sale risk across four accounts.
• The account is a child’s UTMA. Children’s gains may be small enough to fall under the kiddie tax thresholds anyway. For 2026, the first $1,350 of a child’s unearned income is tax-free and only income over $2,700 is taxed at the parents’ rate (Rev. Proc. 2025-32). See our UTMA withdrawal tax rules.
• The money is in a retirement account. There is nothing to harvest there.

Unrealized losses and gains on shares you have not sold are not taxed at all, which is covered in do you pay taxes on a brokerage account if you don’t sell. Harvesting also lowers capital gains in your AGI, one of the levers in how to reduce modified adjusted gross income.

What to write down for the family

Tax-loss harvesting works best as a standing rule, not a December scramble. A one-page note in the family’s FamilyKnowledge® Library might record: which accounts are covered (both spouses, both IRAs), the replacement pairs you have agreed on in advance, the vest and ESPP calendar to check against, the dollar threshold below which you do not bother, and who checks the 1099-Bs. Years from now, that note explains to your children why you sold at a loss on purpose. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.”

Frequently asked questions

Do wash sale rules apply to IRA accounts?

Yes, in one direction. Losses inside an IRA cannot be deducted at all, so the wash sale rule does not matter for sales inside the IRA. But if you sell at a loss in a taxable account and your IRA or Roth IRA buys substantially identical stock within 30 days before or after, the loss is disallowed, and under Rev. Rul. 2008-5 it is not added to the IRA shares’ basis, so it is generally lost.

How long do I have to wait to buy back the same investment?

The window covers 30 days before and 30 days after the sale, so wait at least 31 days after selling before buying the same security back, and make sure nothing was bought in the 30 days before the sale either. That includes purchases by your spouse, your IRAs, automatic dividend reinvestment and new RSU vests or ESPP purchases of the same stock.

Is there a deadline for tax-loss harvesting?

To count for a tax year, the sale has to be made by the end of that calendar year. There is no need to wait for December. Markets often drop in the middle of the year, and a loss harvested in March or June counts the same way. Checking quarterly, against the vest calendar, tends to catch more losses than a single year-end review.

Next step

Pull the lot-level unrealized gain and loss report from each taxable account you and your spouse hold, and set it next to your RSU vest and ESPP purchase dates for the next 60 days. If the overlap is hard to see, our tax management and investment risk management work covers both. This is general education; the right move depends on the family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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