Taking Gains Off the Table in 2026 — Why Rising 10-Year Yields Change the Harvesting Math

The 10-year Treasury yield closed at 5.18% on September 24, 2026  more than three percentage points above the sub-2% range that held through most of 2021. That gap is not background noise. Higher long-term yields function as a higher discount rate applied to all future earnings, which compresses the present value of those earnings and, in turn, compresses the price-to-earnings multiples at which equities trade. For investors holding concentrated positions with large unrealized long-term capital gains, that compression changes the cost-benefit calculus: late 2026 is one of the more compelling windows in recent years to crystallize those gains  and to use harvested losses to offset the tax cost of doing so.

Why Rising Yields Matter for Equity Holders

The relationship is mechanical, not predictive. Every future earnings stream, when discounted at a higher rate, is worth less today. A company earning $10 per share is worth $100 at a 10% discount rate and $200 at a 5% rate. When the 10-year Treasury moves from 1.5% to 5.18%, the required return on all risk assets adjusts. That adjustment compresses multiples  not uniformly, not immediately, but systematically.

This matters most for investors holding positions that have appreciated significantly during the low-rate era. A tech stock bought in 2019 at 20x earnings that now trades at 28x is carrying two kinds of risk simultaneously: the company-specific risk of the position, and the macro risk that continued rate pressure brings multiples back toward historical norms. Neither of these observations is a market call. They are the mechanics that make late 2026 worth examining for investors with concentrated gains.

The Tax Case for Crystallizing Gains Now

Long-term capital gains face a federal rate of 0%, 15%, or 20% depending on taxable income, plus the 3.8% Net Investment Income Tax under � 1411 for taxpayers above $200,000 (single) or $250,000 (married filing jointly) in modified adjusted gross income. At the top bracket, the combined federal rate is 23.8%. California residents add state tax at ordinary income rates  up to 13.3%  making the combined marginal rate for high-income California taxpayers as high as 37.1%.

That is the cost of crystallizing a gain. The question is whether it is worth paying now versus later  and whether harvested losses can reduce that cost to something closer to zero.

The � 1211 Harvesting Math

Under � 1211(b), capital losses offset capital gains dollar-for-dollar. Long-term losses against long-term gains; short-term losses against short-term gains first, with any excess applying across categories. Losses beyond the amount of gains are deductible against ordinary income only up to $3,000 per year, with the remainder carried forward indefinitely.

The practical implication: if you have $200,000 in long-term capital gains from a concentrated position you want to reduce, and your portfolio contains $180,000 in positions currently showing unrealized long-term losses, a systematic harvest brings your net taxable LTCG down to $20,000. At a 23.8% combined federal rate, the tax savings from the offset is approximately $42,840  the difference between $47,600 (23.8% on $200,000) and $4,760 (23.8% on $20,000).

That math scales. A $500,000 gain offset by $450,000 in harvested losses produces the same proportional result. The losses must be realized  paper losses do not count.

The Wash Sale Trap  and How to Work Around It

� 1091 disallows a loss deduction when the investor buys the "same or substantially identical" security within 30 days before or after the sale. The disallowed loss is not permanently lost; it is added to the basis of the repurchased security under � 1091(d), but the timing benefit is gone.

The workaround is to maintain market exposure through a different instrument. Selling an individual stock and buying a sector ETF preserves the economic exposure while avoiding the same-security problem. Selling one S&P 500 index fund (say, SPY) and buying a different one (say, VOO) is widely used in practice  the two funds track the same index but are issued by different funds. The IRS has not ruled definitively that this avoids � 1091, and practitioners treat it as an accepted convention with acknowledged uncertainty. Investors should consult their investment advisor about the appropriate substitute security for their specific holdings.

The 30-day window matters. December 31 is the hard deadline for 2026 losses to count in 2026. Trades need to settle, and settlement takes time. The effective action window for year-end harvesting is October through late November  which means now.

The Yield Alternative Has Become Real

One question that follows from taking gains off the table is where to redeploy the proceeds. In a 1.5% yield environment, there was no compelling case for after-tax fixed income over equities. At 5.18% on the 10-year Treasury, that calculation looks different.

A California investor in the 37% federal bracket sees a 5.18% Treasury yield translate to approximately 3.26% after federal tax (Treasuries are exempt from California income tax). A California muni at the same duration needs to yield only 2.99% to match that on an after-tax basis for a taxpayer at the 37% federal bracket  and most investment-grade California munis currently yield north of 3.5% for five-to-ten-year maturities.

This does not mean fixed income is superior to equities as an asset class. It means the after-tax opportunity cost of sitting in short-duration bonds or munis while reassessing a concentrated equity position is now materially lower than it was at any point between 2010 and 2022. That changes the arithmetic of rebalancing.

The December 31 Clock

Capital gains and losses are recognized in the tax year of the transaction. Gains realized in 2026 are 2026 income. Losses harvested in 2026 offset 2026 gains. Once December 31 passes, the window closes.

Most effective year-end tax planning happens in October and November  when there is still time to analyze the portfolio, identify harvesting candidates, execute trades, allow for settlement, and make decisions without end-of-year price pressure. A review started in September is earlier than most investors act. That timing advantage is the point.

If your portfolio includes concentrated long-term positions, unrealized losses elsewhere, and exposure to yield-sensitive equity multiples, the mechanics of 2026 make a systematic review worth the conversation before Q4 closes. Reach out here.

Daniel R. Litvin, CPA, MBA, is Managing Partner of Lal�a & Black, LLP in Beverly Hills, Calif. The firm focuses on tax planning and business management for founders, family offices, and closely held businesses. Nothing in this article constitutes investment advice; consult your investment advisor regarding portfolio decisions.