Tax-Loss Harvesting
Selling investments at a loss to offset capital gains and reduce taxable income.
What is Tax-Loss Harvesting?
Tax-loss harvesting is the strategy of deliberately selling investments that have declined in value to realize a capital loss, which can then be used to offset capital gains elsewhere in a portfolio — reducing overall tax liability. If losses exceed gains, up to $3,000 of net losses per year can be deducted against ordinary income, with excess losses carried forward to future years. After selling a losing position, investors typically reinvest in a similar (but not identical) security to maintain market exposure. The wash-sale rule prohibits claiming the loss if a 'substantially identical' security is purchased within 30 days before or after the sale.
Example
An investor has a $20,000 capital gain from selling Apple stock. They also hold an ETF currently worth $8,000 less than they paid. By selling the ETF (harvesting the $8,000 loss), they reduce their net taxable gain to $12,000 — saving roughly $1,200–$2,400 in taxes depending on their capital gains tax rate. They then buy a similar but not identical ETF to stay invested.
Source: IRS — Publication 550, Investment Income and Expenses