He Sold Nothing in the 2022 Crash. He Swapped Into a Similar Fund for a Week, Booked $90,000 of Losses, and Hasn’t Paid Capital-Gains Tax Since.

He Sold Nothing in the 2022 Crash. He Swapped Into a Similar Fund for a Week, Booked $90,000 of Losses, and Hasn’t Paid Capital-Gains Tax Since.

David Beren

Sun, August 23, 2026 at 1:47 AM GMT+3 5 min read

Quick Read

• Tax-loss harvesting lets investors sell a losing fund, instantly swap into a similar one, and bank realized losses to offset capital gains for years.

• Losses offset capital gains dollar-for-dollar, then cut ordinary income by up to $3,000 annually, with any unused amount carrying forward indefinitely.

• The wash-sale rule kills the deduction if you, a spouse, or an IRA buys a substantially identical security within 30 days of the sale.

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If you hold stocks or funds in a regular taxable brokerage account, there is a legal move sitting inside it that the IRS wrote into the code itself: tax-loss harvesting. You sell a position that is underwater, immediately buy a similar (but not identical) fund to stay invested, and keep the paper loss as a tax asset you can spend for years. Investors who applied this approach during the 2022 drawdown, when the S&P 500 fell 19.95% between January 3 and December 30 of that year, stayed invested by switching tickers, realized the paper loss, and could draw it down against gains in later years.

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How the Swap Actually Works

The mechanic works like this. A taxpayer sells Fund A at a loss. Within seconds, a purchase of Fund B follows, a fund that tracks a different index or a different slice of the market but moves almost in lockstep with Fund A. Think of a total market fund instead of an S&P 500 fund, or a large‑cap value ETF instead of a large‑cap blend ETF. The loss is now "realized" for tax purposes, even though the economic exposure barely blinked. That realized loss first offsets any capital gains taken during the year, dollar for dollar. Anything left over then reduces ordinary income by up to $3,000 per year. Whatever remains unused rolls forward indefinitely, year after year, until death.

Where the Rule Lives in the Code

The netting and carryforward rules come straight from the Internal Revenue Code. Section 1211(b) caps the annual ordinary‑income offset, while Section 1212(b) lets individuals carry unused capital losses forward indefinitely with no expiration date. The guardrail on the swap itself is Section 1091, better known as the wash‑sale rule, which disallows a loss if a "substantially identical" security is purchased within 30 days before or after the sale. IRS Publication 550 walks through both the netting order and the wash‑sale definition in plain, readable language.

Who Can Do This, Who Cannot

Only taxable accounts qualify for this move. Losses locked inside a 401(k), traditional IRA, Roth IRA, HSA, or 529 plan do nothing at all, because those accounts already shelter gains from taxation. The strategy also assumes that taxable gains exist somewhere in the investor's financial life to offset, whether now or later. That could come from a stock sale, a mutual fund distribution, a rental property, or a business exit. For portfolios sitting entirely in retirement accounts, this move simply isn't available.

Running the Play in 2026

1. The first step is pulling an unrealized gain/loss report from the brokerage and flagging every lot trading below its cost basis.

2. Next comes selecting a replacement fund that tracks a different index. A common pair is a total-market ETF swapped for an S&P 500 ETF, or a large-cap growth fund swapped for a Nasdaq-100 fund. The index differs while the exposure remains similar.

3. The losing lots are then sold, and the replacement buy is placed the same day, keeping the position in the market.

4. At least 31 days should pass before repurchasing the original ticker if a return to it is planned.

5. At tax time, the sale is reported on Form 8949 and Schedule D. Losses first offset capital gains, then up to $3,000 of ordinary income, then carry forward.

With the 10-year Treasury at 4.69%, deferring a tax bill and keeping that capital compounding in the market carries measurable value.

Traps That Void the Whole Thing

The wash-sale rule is the big one. If the taxpayer (or a spouse or an IRA) buys a substantially identical security within 30 days on either side of the sale, the loss is disallowed and tacked onto the cost basis of the replacement lot. Two share classes of the same fund almost certainly count. Two ETFs tracking the same index are a gray area the IRS has never fully defined. Dividend reinvestment on the sold fund inside another account can silently trigger a wash sale. The loss is a deferral: the replacement fund now has a lower cost basis, so a later sale at a gain means tax on the larger spread. The benefit comes from time, tax-bracket arbitrage, and the step-up in basis at death.

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