A market drop did not change the tax rules. Capital losses that are realized by selling still offset capital gains, up to $3,000 of any net loss ($1,500 if married filing separately) can reduce other income, and the rest carries forward. To count for 2026, a sale needs a trade date by December 31, and the wash sale rule must be avoided.
Key takeaways
- Only realized losses count: a position that has fallen in value does nothing for the 2026 return until it is sold, and the trade date, not the settlement date, decides the year.
- Net capital losses can offset up to $3,000 of other income ($1,500 if married filing separately); anything above that carries forward and keeps its short-term or long-term character.
- The wash sale rule disallows a loss if substantially identical stock is bought within 30 days before or after the sale, including purchases in the client's IRA or Roth IRA or by a spouse.
- Prioritize clients with large realized gains this year, recent big losses in taxable accounts, or more than one account across a household.
- The firm explains the tax effect; the client and their financial adviser decide what to buy or sell. Put that split in writing.
Did the stock market crash, and why are tax clients calling?
Strictly speaking, the market did not crash. But the first week of November was rough enough that plenty of people searched for that phrase. CNBC described the Nasdaq trying to recover from its worst rout in 19 months, and The New York Times put the hit to technology stocks at around $2.5 trillion.
For a tax practice, the headline matters less than the timing. A sharp drop eight weeks before December 31 leaves many clients holding positions worth less than they paid, often alongside gains they took earlier in the year. That combination is exactly what tax-loss harvesting deals with, and clients will hear about it from social media, their brokerage app or a neighbor.
The questions will arrive whether or not the firm sends anything. A short, accurate note now is better than ten rushed phone calls on December 29.
It also helps to set expectations early. A paper loss on a fund that has fallen 20% does nothing for the 2026 return unless it is sold, and selling has consequences beyond tax: the client gives up the position, may pay trading costs and resets the cost basis on anything they buy back. Clients should hear the tax rules from their preparer and the investment case from their adviser, in that order.
How does tax-loss harvesting work under the IRS rules?
Tax-loss harvesting means selling an investment at a loss so that the loss can be set against gains on the return. Nothing about it is special to a falling market; the rules are the ordinary capital gain and loss rules in IRS Topic 409 and Publication 550.
The rules clients need to hear
- Realized, not paper, losses. A loss counts only when the position is sold or otherwise disposed of.
- Short-term vs long-term. Assets held one year or less give short-term results; held longer than one year, long-term. Gains and losses are netted within each group, then the two groups are netted against each other.
- The $3,000 limit. If losses exceed gains, the net loss reduces other income by up to $3,000, or $1,500 for married filing separately.
- Carryforward. Any excess carries to later years and keeps its character, so a long-term loss carried forward stays long-term.
- Trade date decides the year. Publication 550 says a sale of exchange-traded securities is reported in the year of the trade date, even if it settles in January.
Reporting runs through Form 8949, with totals carried to Schedule D (Form 1040). Brokers report the sales on Form 1099-B.
What does the wash sale rule catch that clients miss?
The wash sale rule trips up more clients who sell on their own than any other part of the process. Under Publication 550, a loss is disallowed if, within 30 days before or after the sale, the taxpayer buys substantially identical stock or securities, acquires a contract or option to buy them, or acquires them in a fully taxable trade.
Two extensions surprise people:
- Retirement accounts. Buying substantially identical stock in the client's own IRA or Roth IRA also triggers a wash sale.
- Family and entities. A purchase by the client's spouse or by a corporation the client controls counts too.
Normally a disallowed loss is not lost forever; it is added to the basis of the replacement shares, and the holding period carries over. The IRA case is the exception. Publication 550 excludes that situation from the basis adjustment, so the benefit of the loss is effectively gone.
The window also runs both ways. A sale on December 30 can be undone by a dividend reinvestment in mid-December or an automatic purchase in early January. Ask about automatic investment plans, reinvested dividends and any accounts the spouse manages.
Which clients should the firm contact first?
Not every client needs a call. Most people with modest fund holdings in workplace plans have nothing to harvest, because gains and losses inside an IRA or 401(k) are outside these rules. A quick sort of the client list by last year's return keeps the effort where it pays. Our year-end tax planning outreach plan covers the wider letter; this is the market-drop slice of it.
| Client situation | Priority | What to send |
|---|---|---|
| Large realized gains in 2026 (sold a business interest, property or concentrated stock) plus a taxable brokerage account | High: contact this month | Personal note, request a realized gain and loss report, offer a call with their adviser |
| Heavy holdings in technology or AI stocks in taxable accounts | High | Explain the $3,000 limit, carryforward and wash sale rule; ask for an unrealized gain and loss report |
| Existing capital loss carryover from prior years | Medium | Remind them of the carryover figure from their last return before they sell anything |
| Married couples with separate brokerage accounts or IRAs | Medium | Wash sale warning covering both spouses and all retirement accounts |
| Retirement accounts only, or no investments | Low | General newsletter item only |
| Trading activity with options, digital assets or many accounts | Case by case | Flag for a reviewer; rules and reporting differ, so avoid a template reply |
Clients who expect a large realized gain may also need a fresh look at estimated payments; see our fourth-quarter estimated tax reminder plan.
What does a worked example look like?
The figures below are illustrative only. A married couple filing jointly sold a long-held stock in March and realized a $9,000 long-term gain. In June they sold shares held for eight months, for an $18,000 short-term gain. After the November drop, their taxable account shows three paper losses: stock B, held six months, down $11,000; fund A, held three years, down $14,000; and fund C, held two years, down $10,000.
If they sell all three before December 31
- Short-term: $18,000 gain minus $11,000 loss = $7,000 net short-term gain.
- Long-term: $9,000 gain minus $24,000 losses = $15,000 net long-term loss.
- Combined: $7,000 minus $15,000 = $8,000 net capital loss.
- Up to $3,000 reduces ordinary income in 2026; the remaining $5,000 carries forward as a long-term loss.
Now add the trap. The wife's IRA has a monthly purchase of fund A on December 20. If she sells fund A in her taxable account on December 15, the IRA buy falls inside the 30-day window. The $14,000 loss is disallowed, and because the purchase was in an IRA, it is not added to any basis. The couple's result swings from an $8,000 net loss to a $6,000 net gain.
One more practical point: the carryover figure on the 2026 return depends on taxable income as well, so model it rather than quoting the headline number.
What should the client note say?
Keep the first message short and factual. Clients skim anything longer than a screen, and a long note reads like a sales pitch. A useful structure has five parts:
- Why you are writing: the recent market drop means some clients may have losses in taxable accounts that could matter for their 2026 return.
- The three rules: losses count only when realized by a trade dated by December 31; net losses beyond gains offset up to ,000 of other income (,500 if married filing separately), with the rest carried forward; and buying the same or substantially identical investment within 30 days, including in an IRA or by a spouse, can cancel the loss.
- What you need from them: realized and unrealized gain and loss reports, and a list of automatic purchases.
- Who decides: any trade is their decision, made with their financial adviser; the firm will show the tax effect.
- The deadline: a date in mid-December by which the documents should reach the firm.
Send the high-priority group a personal version naming their own realized gains. Everyone else can get the general version.
How should you collect broker statements and 1099-Bs?
Harvesting decisions happen in December, but the paperwork arrives in February. Plan for both.
Before December 31
- A realized gain and loss report for 2026 from every taxable account, so you know what gains already exist.
- An unrealized gain and loss report showing lots, purchase dates and cost basis.
- A list of automatic purchases and dividend reinvestments across all accounts, including IRAs and the spouse's accounts.
- The client's prior-year capital loss carryover, which you can read from last year's Schedule D and the carryover worksheet.
After year end
The IRS General Instructions for Certain Information Returns give brokers until February 15 to furnish Form 1099-B to recipients, moved to the next business day when that date falls on a weekend or legal holiday. Ask for the full consolidated statement, not just the summary page. The detail shows wash sale adjustments the broker has already made, but brokers generally only see their own accounts, so a spouse's or IRA purchase elsewhere may not be reflected.
Ask for corrected 1099-Bs too. Late corrections are common in heavy-trading years, and filing before they arrive often means an amended return.
Set a firm internal date as well. If a client has not sent their realized gain and loss report by mid-December, there is little time left to model anything before the year closes, so the reminder schedule should start in November rather than after Thanksgiving.
Where does the tax firm's role stop?
Explaining how a loss would be treated on a return is tax work. Telling a client which fund to sell, or what to buy instead, is investment advice, and most tax practices are neither licensed nor insured for it. Keep the two apart.
- Say what the rules do: netting, the $3,000 limit, carryforward, wash sales and the trade-date cut-off.
- Run the numbers on scenarios the client or adviser proposes, and show the tax effect of each.
- Leave the decision with the client, and suggest that they discuss any trade with their registered financial adviser or broker.
- Put it in writing. A short year-end note stating that the firm has given tax information only, not investment recommendations, protects everyone.
Check that your engagement letter covers year-end planning at all. If it only covers return preparation, extra modeling work may be a separate, billable engagement. Where a client's circumstances are unusual, such as trader status, options strategies or digital assets, refer to the IRS guidance and a specialist rather than a template.
How Zaquil handles year-end tax-loss harvesting outreach
In practice, the work is triage, collection and a clear paper trail, all inside eight weeks. Here is how a firm runs it in Zaquil.
- One inbox for the outreach. The firm sends the market-drop note by email or SMS from the shared inbox, and replies from every channel land in one thread on the client record. AI reply drafts, built from the firm's own knowledge base, handle the repeat questions about the $3,000 limit and wash sales, ready for a preparer to check before sending.
- Document requests in the portal. The client sees a short list in their branded secure portal: realized and unrealized gain and loss reports, a list of automatic purchases, and later the consolidated 1099-B. They upload each one against the request, and a short questionnaire asks about spouse and IRA accounts.
- A job per high-priority client. A year-end planning job template carries the checklist from the triage table, and the kanban board shows who is waiting on documents, who has had a scenario run and who is done.
- Automations and deadlines. Chasers go out automatically if the reports are not uploaded, with a December deadline on the job.
- Scope in writing. The tax-information-only letter goes out for e-signature, and the signed PDF certificate sits on the client record.
See how this fits a tax practice on the accounting and tax solutions page, or compare plans on pricing.
Frequently asked questions
Did the stock market crash in November 2026?
Not in the technical sense, but it was a sharp sell-off. CNBC described the Nasdaq trying to recover from its worst rout in 19 months, and The New York Times reported a wipeout of around $2.5 trillion in technology stocks. For tax purposes, the label does not matter. What matters is whether clients realize losses by selling before December 31 and how those losses net against their gains.
What is tax-loss harvesting?
Tax-loss harvesting means selling an investment in a taxable account for less than its cost basis so the realized loss can offset capital gains on the return. If losses exceed gains, part of the net loss can reduce other income and the rest carries forward. It is a timing and reporting decision, not a guaranteed saving, so the client should weigh it with their financial adviser.
How much of a capital loss can reduce ordinary income?
According to IRS Topic 409, a net capital loss can be deducted against other income up to the lesser of $3,000, or $1,500 if married filing separately, and the total net loss. Any amount above that limit is not lost. It carries forward to later years, where it first offsets capital gains and then up to the same annual limit of other income.
Does a capital loss carryover keep its short-term or long-term character?
Yes. Publication 550 explains that a carried-over loss stays long-term or short-term, and a long-term loss carried into the next year reduces that year's long-term gains before short-term gains. The size of the carryover also depends on taxable income for the year, so it should be worked out on the carryover worksheet rather than estimated from the headline loss.
What is the deadline to harvest a loss for 2026?
For securities traded on an established market, the sale needs a trade date on or before December 31, 2026. Publication 550 says the gain or loss is reported in the year of the trade date, even if settlement happens in January. Clients should still avoid waiting until the last session, because broker cut-offs, order problems and holiday trading hours can leave very little room to fix mistakes.
What is the wash sale rule?
A wash sale happens when someone sells stock or securities at a loss and, within 30 days before or after the sale, buys substantially identical stock or securities, acquires a contract or option to buy them, or acquires them in a fully taxable trade. The loss is disallowed on the current return. In most cases it is added to the basis of the new shares instead.
Does buying the same stock in an IRA trigger a wash sale?
Yes. Publication 550 lists acquiring substantially identical stock for the taxpayer's own IRA or Roth IRA as a wash sale. In that case the disallowed loss is not added to the basis of the IRA shares, so the tax benefit is effectively lost. Automatic monthly contributions and dividend reinvestments inside retirement accounts are the usual culprits, so ask about them directly.
Can a spouse's purchase cause a wash sale?
Yes. Under Publication 550, if a client sells stock at a loss and their spouse buys substantially identical stock within the 30-day window, it is a wash sale. The same applies to a corporation the client controls. Because brokers usually only see their own accounts, the household may need to check purchases across every account themselves before filing.
Where are harvested losses reported?
Most sales are reported on Form 8949, using the details from Form 1099-B, and the totals then go to Schedule D (Form 1040). Short-term and long-term transactions go in separate parts of Form 8949. Wash sale adjustments reported by the broker also carry through to Form 8949. A prior-year carryover is entered on Schedule D from the carryover worksheet.
When will clients receive their Form 1099-B?
The IRS General Instructions for Certain Information Returns give brokers until February 15 to furnish Form 1099-B to recipients, moving to the next business day when that date falls on a weekend or legal holiday. Many brokers issue corrected forms later, especially after heavy trading, so firms should confirm a client's statements are final before filing a return with many sales.
Can a tax preparer tell a client which investments to sell?
A tax firm can explain how the rules treat a proposed sale and model the tax effect of scenarios. Recommending which securities to sell or buy is investment advice, which most tax practices are not licensed to give. The safer approach is to give tax information in writing and suggest that the client make trading decisions with their financial adviser or broker.
Is tax-loss harvesting worth it for every client?
No. Gains and losses inside IRAs and 401(k) plans are outside these rules, and clients with small taxable holdings may have little to gain. Selling also locks in a lower cost basis for any replacement, which can mean more gain later. The value depends on each client's income, gains, carryovers and plans, so check the IRS guidance and their circumstances first.
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