What it is
Tax-loss harvesting is an investment strategy where investors intentionally sell investments that have declined in value at a loss. The purpose is to use these realized losses to offset capital gains from other investments, thereby reducing their overall capital gains tax liability. If net capital losses exceed capital gains, investors can typically deduct up to $3,000 of those losses against ordinary income in a given tax year, carrying forward any remaining losses to future years.
This strategy is often implemented towards the end of the calendar year or during periods of market downturns. To comply with IRS rules, investors must avoid the "wash-sale rule," which prohibits buying a substantially identical security within 30 days before or after selling the original security at a loss. Tax-loss harvesting can significantly improve after-tax returns, especially for active traders or those with substantial capital gains from profitable investments.
Why it matters
Tax-loss harvesting allows you to reduce your tax bill by offsetting capital gains with investment losses. It's a smart strategy to boost your net returns, especially in volatile markets.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice