What is the purpose of tax-loss harvesting?

Tax-loss harvesting is a strategy used to minimize an individual's tax liability by realizing losses on investments that have declined in value. When an investor sells a security at a loss, that loss can be used to offset gains from other investments that have been sold for a profit. This process helps to lower taxable income, effectively reducing the overall tax liability for the individual for that tax year.

By utilizing tax-loss harvesting, investors can strategically manage their investment income, taking advantage of losses to mitigate taxes owed on capital gains. For instance, if an investor sold stocks and made a capital gain from those sales, they could sell other stocks that are underperforming to realize a loss, thus offsetting those capital gains. This approach not only helps in reducing the current year's tax burden but can also carry forward unused losses to future tax years to offset gains in those years.

Overall, this method is a savvy financial strategy that aligns with proactive tax planning, allowing investors to manage their portfolios in a tax-efficient manner while still engaging in the marketplace.