What is tax-loss harvesting?
Tax-loss harvesting is a strategy that helps you reduce the taxes you owe on the capital gains from one investment with the capital losses from a different investment. It reduces the taxes you're required to pay on the capital gains you receive from an investment increasing in value.
Tax-loss harvesting won't make you whole or eliminate your taxes, but it can help offset what you owe on your taxable investment accounts. It's one of the best strategies you can use to help you balance your taxes across your investment portfolio.
How can stock losses help you?
Just because an investment hasn't risen in value doesn't mean it isn't still valuable for the time being. You might consider selling the investment that has lost its value, so it can provide a silver lining come tax season.
Of course, there are limitations to how you can use tax-loss harvesting. One of these limitations is the wash-sale rule.
While tax-loss harvesting is perfectly acceptable by the IRS’s standards, they do have a rule about using capital losses as deductions on your taxes.
If you have a capital loss that you use to minimize the taxes on an investment’s capital gains, you cannot then use that loss as a deduction on your taxes.