United States
Hong KongCapital gains, losses and the netting order
Gains and losses net within their holding period first, then across. A net capital loss offsets up to USD 3,000 of ordinary income a year, with the rest carried forward indefinitely. Repurchasing within thirty days triggers the wash sale rule.
A small set of rules, all of them fixed rather than indexed, which makes them worth memorizing exactly.
Holding period
More than one year is long term. One year or less is short term.
Long-term gains are taxed at preferential rates - 0, 15 or 20 per cent depending on income. Short-term gains are taxed as ordinary income. That difference is the single largest tax lever in the investment domain.
Two exceptions to the preferential rates: collectibles including gold at a maximum of 28 per cent, and unrecaptured section 1250 gain on depreciated real property at 25 per cent.
The netting order
- Net short-term gains against short-term losses.
- Net long-term gains against long-term losses.
- If one is a net gain and the other a net loss, net them against each other.
- A net capital loss offsets up to USD 3,000 of ordinary income - 1,500 married filing separately.
- Any remaining loss carries forward indefinitely, keeping its character.
Within their own period first. That ordering is what questions test, because netting across too early produces a different answer.
The wash sale rule
A loss is disallowed if you buy a substantially identical security within thirty days before or after the sale. Sixty-one days in total, counting the day of sale.
The disallowed loss is added to the basis of the replacement, so it is deferred rather than lost. The holding period also carries over.
Selling at a loss in a taxable account and buying the same fund in an IRA triggers the rule, and the loss is permanently lost rather than deferred, because there is no basis to add it to. A spouse's purchase counts too.
Harvesting properly
- Sell the loss position and buy something similar but not substantially identical - a different index fund tracking a related but distinct index.
- Or wait thirty-one days, accepting the market exposure risk.
- Use specific identification of lots rather than a default method, so you sell the highest-basis shares.
- Watch the netting order - harvesting a short-term loss to offset a short-term gain is worth more than offsetting a long-term one.
- Check dividend reinvestment, which can trigger the rule without any decision being made.
That last point is the practical trap. Automatic reinvestment inside the window creates a wash sale nobody intended.
What harvesting is worth
It defers rather than eliminates, because selling reduces basis and increases a future gain. The value is the time value of the deferral, plus the possibility of a lower rate later, plus the step-up at death if the position is never sold.
A question describing harvesting as eliminating tax has overstated it, which is generally the distractor.
Dollar limits and rate thresholds here are indexed annually and several were changed by the 2025 reconciliation act. Confirm the current figure against the IRS before relying on it, and expect the exam to test the rule rather than the number.
Common questions
What is the long-term holding period?
More than one year. One year or less is short term and taxed as ordinary income, while long-term gains receive preferential rates of 0, 15 or 20 per cent depending on income.
How much capital loss can offset ordinary income?
Up to USD 3,000 a year, or 1,500 married filing separately. The remainder carries forward indefinitely and keeps its short-term or long-term character.
What is the wash sale rule?
A loss is disallowed if a substantially identical security is bought within thirty days before or after the sale - sixty-one days in total. The loss is added to the replacement's basis.
Does the wash sale rule apply across accounts?
Yes. Buying the same security in an IRA after selling at a loss in a taxable account permanently loses the deduction, because there is no basis to add it to. A spouse's purchase counts too.
Does harvesting eliminate tax?
No, it defers it, because selling reduces basis and increases a future gain. The value lies in the deferral, a possibly lower future rate, and the step-up in basis at death.