Tax-loss harvesting is a strategy used to minimize tax liability by selling securities that have decreased in value and realizing a capital loss. The idea is to offset capital gains on other investments by using the capital losses to reduce or eliminate the amount of taxes owed on those gains.
To implement tax-loss harvesting, an investor would sell securities that have decreased in value and realize a loss. The investor can then use that loss to offset any capital gains they have realized during the same tax year. If the capital loss exceeds the capital gains, the investor can use up to $3,000 of the excess loss to offset ordinary income. If the loss is greater than $3,000, the remaining amount can be carried forward to offset gains or income in future tax years.
It's important to note that tax-loss harvesting should not be the only factor considered when making investment decisions. It's crucial to focus on long-term investment strategies and consider the overall risk and return of the investments, as well as any transaction costs associated with selling securities. Additionally, tax laws are complex and subject to change, so it's important to consult a tax professional before implementing any tax strategy.