tax-loss harvesting
The strategy of selling investments at a loss to offset capital gains taxes, reducing overall tax liability while maintaining a similar portfolio exposure.
Example
“In December, the advisor sold losing positions to harvest $15,000 in tax losses that offset gains elsewhere in the portfolio.”
Memory Tip
Tax-loss HARVESTING = picking your losses like crops — to use against your gains.
Why It Matters
Tax-loss harvesting can significantly reduce the taxes you owe on investment gains, potentially saving thousands of dollars annually. By strategically managing losses in your portfolio, you keep more of your investment returns instead of giving them to the government, which can accelerate wealth building over time.
Common Misconception
Many people believe that selling an investment at a loss means they have failed or lost money permanently. In reality, tax-loss harvesting involves selling a losing position and often immediately buying a similar investment, so you maintain your desired portfolio exposure while capturing the tax benefit.
In Practice
Suppose you have $10,000 in Company A stock that dropped to $7,000, and you also have $5,000 in unrealized capital gains elsewhere. You sell the Company A stock to realize the $3,000 loss, which offsets your $5,000 gain, leaving only $2,000 in taxable gains instead of $5,000. You then immediately purchase Company B stock in the same sector to stay invested in the market.
Etymology
Plain English: HARVESTING (collecting) TAX LOSSES to offset gains.
Common Misspellings
File your taxes free with TurboTax
Related Terms
More in taxes
Other taxes terms you should know
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.