Tax loss harvesting

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Tax Loss Harvesting

The sale of securities at a loss toward the end of a calendar year. One conducts tax loss harvesting to offset the losses against gains made earlier in the year. This reduces one's tax liability. In order for tax loss harvesting to work properly, one must offset short-term losses against short-term gains, and long-term losses against long-term gains. This is because of the difference between income taxes (paid on short-term gains) and capital gains taxes (paid on long-term gains).

Tax loss harvesting.

Tax loss harvesting describes the process of selling certain securities at a loss to offset the taxable gains from another investment. Many investors use this technique to reduce their tax bill.

The difference between short- and long-term capital gains plays a key role in developing a loss harvesting strategy, since you must use short-term losses to offset short-term gains and long-term losses to offset long-term gains.

At the end of the tax year, when many investors are selling off securities for tax purposes, tax loss harvesting may affect the price of certain securities and may even noticeably impact the market as a whole.