Tax-loss harvesting is a strategy to intentionally create a capital loss to offset a capital gain. For example, let’s say you sold a security for a capital gain. You might sell another security at a loss to turn an unrealized loss into a realized loss. Doing so would reduce your net capital gains and, therefore, reduce the capital gains taxes you’ll owe.
You may then use the proceeds of the sale to reinvest in a similar security, but there’s a catch. The federal government’s wash sale rule prevents investors from selling a security and then buying a new “substantially identical” security within 30 days. However, you can either reinvest those proceeds into another security that isn’t considered substantially identical or simply wait over 30 days to purchase a substantially identical security.
While you won’t notice a significant difference in your portfolio over the long run with tax-loss harvesting, you may enjoy a smaller capital gains tax bill at the end of the year.