Tax-loss harvesting is an investment strategy that aims to maximize after-tax returns by offsetting capital gains with capital losses. Here are some key things to know about tax-loss harvesting:

• When you sell an investment at a loss, that loss can be used to offset capital gains from other investments sold at a profit. This helps reduce your overall tax liability.
• For example, if you sold one stock at a $3,000 loss and another at a $2,000 gain, the loss would cancel out the gain, leaving you with only a $1,000 net capital gain to report on your taxes.
• Losses must be used within the same tax year to offset gains. Any excess losses can be carried forward to future years.
• It’s done by selling investments that have lost value to realize the losses. Then you buy back similar investments to maintain your market exposure.
• This is only effective if done before the end of the calendar year to show losses on that year’s tax return.
• There is a “wash sale” rule preventing buying back the same or substantially identical security 30 days before or after.
• Successfully harvesting losses helps boost long-term returns by lowering the annual tax bite on investment profits.

Here is an example of how tax-loss harvesting can benefit an investor. Let’s say John has a portfolio valued at $100,000 as of December 31st. Within the portfolio:

– Stock A was purchased for $10,000 and is now worth $8,000, resulting in a $2,000 loss.

– Stock B was purchased for $20,000 and is now worth $25,000, resulting in a $5,000 gain.

– Stock C was purchased for $30,000 and is now worth $30,000, neither a gain nor loss.

– Stock D was purchased for $40,000 and is now worth $42,000, resulting in a $2,000 gain.

Without tax-loss harvesting, John would owe tax on the $7,000 total capital gains ($5,000 + $2,000). However, through tax-loss harvesting, John sells Stock A at a $2,000 loss and purchases a similar replacement investment. This $2,000 loss offsets the $2,000 gain from Stock D, reducing the total gains to $5,000. As a result, John lowers his total capital gains tax obligation. This leaves more money compounding over time in his investment portfolio.

So tax-loss harvesting provides an opportunity to reduce taxes and increase long-term investment returns because it’s a way to maximize after-tax profits by using investment losses to directly reduce taxes owed on capital gains.