Tax-Loss Harvesting
Definition
An investment strategy that involves selling securities at a loss to offset capital gains and reduce taxable income. After selling, investors typically purchase a similar (but not "substantially identical") investment to maintain their portfolio allocation while capturing the tax benefit. Up to $3,000 in net losses can offset ordinary income annually, with excess losses carried forward. The wash sale rule must be observed to ensure the loss is deductible.
Example
You have $10,000 in realized capital gains from stock sales. You sell another holding at a $10,000 loss and immediately buy a similar ETF. The loss offsets your gains, reducing your capital gains tax to $0.