What is tax loss harvesting?

Tax loss harvesting is a strategy employed by investors to manage and reduce their tax liabilities. It involves selling investments that have declined in value—known as losing investments—or securities that have suffered a loss. The primary goal of this strategy is to offset capital gains realized from selling other investments that have appreciated in value. By realizing these losses, an investor can potentially reduce their taxable income, as capital losses can be used to offset capital gains.

For instance, if an investor sells a stock that has decreased in value and realizes a loss, this loss can be applied against any capital gains they have earned in that tax year. Moreover, if the losses exceed the gains, the investor may be able to use the remaining loss to offset ordinary income, up to a certain limit each year. This makes tax loss harvesting an effective way to manage tax obligations and enhance overall investment strategy.

The other strategies mentioned, such as increasing taxable income or focusing solely on selling winning investments, do not align with the principles of tax loss harvesting. Additionally, deferring taxes on retirement accounts pertains to a different approach in financial planning, which does not involve the active realization of investment losses. Therefore, the correct understanding of tax loss harvesting as a method to sell losing investments to offset gains is integral