By Joe Wallin | April 2026 | ~6 min read
Washington's new 9.9% income tax has a hard threshold: $1 million in federal adjusted gross income (AGI). Below that line, you owe nothing. Above it, you owe 9.9% on every dollar over the threshold.
That binary structure makes the $1 million line one of the most consequential numbers in Washington tax planning. And it makes tax loss harvesting — the practice of strategically realizing investment losses to offset gains — more valuable for Washington residents than it has ever been.
Why the Threshold Changes Everything
In the federal tax system, loss harvesting saves you money at your marginal rate — but the savings are incremental. Reducing your taxable income by $100,000 at the federal level saves you $37,000 if you're in the top bracket. Meaningful, but not transformative.
In Washington's system, loss harvesting can do something the federal system cannot: it can move you below the $1 million threshold entirely, eliminating your Washington tax obligation for the year. The savings are not just marginal — they can be total.
Consider a Washington resident with $1.3 million in AGI. Without loss harvesting, they owe 9.9% on $300,000 = $29,700 in Washington tax. If they can realize $300,000 in investment losses, their AGI drops to $1 million and their Washington tax drops to zero. The loss harvesting didn't just save $29,700 in Washington tax — it also produced federal tax savings from the reduced AGI.
That is a powerful incentive to actively manage your realized gains and losses each year.
How Tax Loss Harvesting Works
The concept is simple: sell investments that are currently trading below your cost basis, realize the loss, and use that loss to offset gains or reduce your taxable income.
Under federal tax rules, capital losses first offset capital gains (short-term losses against short-term gains, then long-term losses against long-term gains, then any remaining net losses cross over). If your net capital losses exceed your capital gains, you can deduct up to $3,000 per year against ordinary income. Unused losses carry forward to future years indefinitely.
Because Washington's income tax starts with federal AGI, every dollar of loss that reduces your federal AGI also reduces your Washington taxable income. The loss doesn't need to be "Washington-specific" — it just needs to reduce your federal AGI.
The Wash Sale Rule
The federal wash sale rule (IRC Section 1091) prohibits you from claiming a loss if you purchase a "substantially identical" security within 30 days before or after the sale. If you trigger the wash sale rule, the loss is disallowed and added to the basis of the replacement security.
This means you cannot simply sell a stock at a loss and immediately buy it back. You must either wait 31 days before repurchasing the same security, or purchase a similar but not "substantially identical" investment to maintain your market exposure during the waiting period.
For publicly traded stocks, "substantially identical" is generally interpreted narrowly — shares of the same company are substantially identical, but shares of a different company in the same industry (or a broad index fund versus individual stocks) are generally not.
Note on crypto: As of early 2026, cryptocurrency is not subject to the wash sale rule under federal law. You can sell crypto at a loss and immediately repurchase the same asset. However, Congress has repeatedly discussed extending the wash sale rule to digital assets, and this could change. Check the current rules before executing this strategy with crypto. For more on crypto and Washington's tax, see Crypto and Digital Assets Under Washington's 9.9% Income Tax.
Strategies for Washington Residents
Year-End Threshold Management
The most powerful application of loss harvesting for Washington residents is threshold management. As the end of each tax year approaches, project your AGI. If you are above — or close to — $1 million, identify investments with unrealized losses that can be sold to bring your AGI below the line.
This requires a disciplined approach. Starting in October or November each year, review your portfolio for loss harvesting candidates, estimate your remaining income for the year (including any expected bonuses, K-1 income, or capital gains distributions from mutual funds), calculate how much in losses you need to realize to stay at or below $1 million, and execute the trades before December 31.
The payoff can be enormous. Every dollar of AGI you push below $1 million saves 9.9 cents in Washington tax — on top of whatever federal savings the loss generates.
Gain-Loss Matching Throughout the Year
Don't wait until December. If you realize a significant gain during the year — from selling a business, exercising stock options, or a large liquidity event — look for offsetting losses immediately. The longer you wait, the more market risk you take on: investments that are currently underwater may recover before year-end, reducing your available losses.
This is particularly relevant for founders and executives who have concentrated stock positions. If you are selling company stock (after an IPO, for example) and generating large gains, simultaneously harvesting losses in other parts of your portfolio can offset those gains dollar-for-dollar for purposes of both federal tax and Washington's income tax.
Building a Loss Harvesting Portfolio
Some advisors construct portfolios specifically designed to generate harvestable losses. The approach typically involves holding diversified, tax-efficient investments as a core portfolio, investing a portion of the portfolio in individual securities or sector funds where volatility creates periodic loss-harvesting opportunities, and systematically harvesting losses and replacing sold positions with similar (but not substantially identical) investments.
Over time, this approach can generate a steady supply of losses to offset gains and manage AGI — essentially creating a "tax alpha" that complements investment returns.
Coordinating with Other Income
Loss harvesting is most effective when coordinated with your full income picture. If you have control over the timing of other income — such as Roth conversions, the exercise of stock options, business distributions, or the sale of property — coordinate those events with your available losses.
For example, if you plan to exercise ISOs or NSOs that will generate a large income spike, harvesting losses in the same year can partially or fully offset the income for Washington tax purposes. The stock options and RSUs post covers how equity compensation income flows into Washington's tax base.
The Carry-Forward Advantage
Capital losses that exceed your current-year gains (beyond the $3,000 ordinary income offset) carry forward indefinitely under federal law. This carry-forward is valuable in its own right — but it is especially valuable for Washington residents because it gives you a bank of losses to deploy in future high-income years.
If you have a year with $2 million in AGI and $500,000 in loss carry-forwards, deploying those carry-forwards reduces your Washington taxable income by $500,000 — saving $49,500 in Washington tax.
Building and maintaining a loss carry-forward balance is an underappreciated component of long-term Washington tax planning.
Limitations and Considerations
You need losses to harvest. In a sustained bull market, your portfolio may not have significant unrealized losses. Loss harvesting is opportunistic — it works best when markets are volatile or declining.
The $3,000 ordinary income limit matters. If your high AGI is driven by ordinary income (salary, bonuses, pass-through income) rather than capital gains, loss harvesting is limited to the $3,000 annual deduction against ordinary income (plus any capital gains you can offset). This makes loss harvesting most powerful when your AGI includes significant capital gains.
Basis erosion. When you harvest a loss and reinvest in a similar (but not identical) asset, your new basis is lower. If the replacement investment appreciates, you will have a larger gain when you eventually sell it. Loss harvesting doesn't eliminate tax — it defers it. But deferral has real value, especially if you can defer until a year when your AGI is below $1 million.
The PTE election may be more impactful for some. If your income above $1 million is primarily pass-through business income, the PTE election reduces the effective Washington rate from 9.9% to ~6.2% with less complexity than active loss harvesting. Both strategies can be used together, but prioritize the PTE election if you qualify.
Consult your advisor. Loss harvesting interacts with federal tax rules, state tax rules, portfolio strategy, and your overall financial plan. It should be implemented as part of a coordinated approach, not in isolation.
What to Do Now
If you are a Washington resident with a taxable investment portfolio and an AGI near or above $1 million, loss harvesting should become a routine part of your annual tax planning. Start by reviewing your portfolio for unrealized losses today. Not because the tax takes effect today — but because building the habit and infrastructure now means you will be ready to execute when January 1, 2028 arrives.
For more on managing Washington's income tax, see our Washington State Taxes guide and Tax Planning Guide for High Earners.
This post is for informational purposes only and does not constitute legal or tax advice. Consult with a qualified tax professional regarding your specific circumstances.
