Selling losing investments to offset capital gains and reduce tax liability.
Tax-loss harvesting is the strategy of selling investments at a loss to offset capital gains from other investments, reducing your overall tax liability. For example, if you have a $5,000 gain from one stock and a $3,000 loss from another, your net gain is $2,000, reducing taxable capital gains. If losses exceed gains in a year, you can deduct up to $3,000 against ordinary income; excess losses carry forward indefinitely. Tax-loss harvesting is most effective in taxable (non-retirement) accounts; it doesn't apply to 401(k) or IRA accounts where investments aren't taxed annually. A key limitation: the wash-sale rule prevents claiming losses if you buy substantially identical securities within 30 days before or after the sale. Tax-loss harvesting is a valuable strategy for tax-conscious investors managing taxable portfolios.