Loss Harvesting is an investment strategy used to minimize tax liability by selling securities at a loss to offset capital gains made from other investments.
The purpose of loss harvesting is to reduce the taxable income that an investor must report to the IRS. By selling underperforming assets, investors can realize losses that can then be used to offset gains from profitable investments, thereby lowering the overall tax burden. For example, if an investor has $10,000 in capital gains from selling stocks but also has $4,000 in losses from other investments, they can use the losses to offset the gains, resulting in taxable gains of only $6,000. Additionally, if losses exceed gains, investors can often carry forward the excess losses to future tax years.
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