What does tax loss harvesting involve?

Tax loss harvesting is a strategy used primarily by investors to manage their tax liabilities. It involves realizing losses on investments that have decreased in value in order to offset capital gains realized elsewhere in their portfolio or to reduce taxable income. By selling these underperforming assets, investors can effectively "harvest" the losses, which can then be used to mitigate the tax impact of profits taken from other investments.

This process is particularly useful in the context of capital gains taxes, as losses can be used to offset gains dollar for dollar. If the total losses exceed the gains for a given year, the investor can use up to a specified amount of the remaining losses to offset ordinary income, which further reduces tax liability. This makes tax loss harvesting a proactive approach to tax planning and investment management.