What is tax-loss harvesting?

Tax-loss harvesting is a strategy utilized by investors to minimize their tax liability on capital gains. This approach involves selling securities that have incurred a loss in order to offset gains that have been realized on other investments. By doing so, investors can effectively lower their taxable income, as the losses can be used to reduce the amount of capital gains that are subject to taxation. This not only helps in managing the tax burden in the current year but can also be beneficial for future tax planning.

The effectiveness of tax-loss harvesting is particularly noticeable in volatile markets where gains and losses can easily occur within a trading portfolio. By carefully selecting which positions to sell at a loss, investors can strategically enhance their tax efficiency without significantly altering their overall investment strategy. This makes it a valuable technique for optimizing after-tax returns on investments.