Portfolio · Investing Glossary
What Is Tax-Loss Harvesting?
Selling an investment at a loss to offset capital gains and reduce your tax bill.
The Full Definition
Tax-loss harvesting is the practice of selling an investment that has dropped in value to realize a capital loss, which can offset capital gains elsewhere in your portfolio — or up to $3,000 of ordinary income per year if losses exceed gains. The proceeds are typically reinvested in a similar (but not "substantially identical") asset to keep your market exposure, avoiding the IRS's wash-sale rule, which disallows the loss if you buy back the same security within 30 days.
Real-World Example
An investor with a $5,000 capital gain from selling one stock and a $5,000 unrealized loss in another can sell the loser to fully offset the gain, owing $0 in capital gains tax that year — then reinvest the proceeds in a similar fund to stay invested.
Related Terms
- Cost BasisThe original purchase price of an investment, used to calculate gains or losses.
- RebalancingRestoring your portfolio to its target allocation after market movements.
- Capital GainsThe profit earned when an investment is sold for more than its original purchase price.
- Total ReturnInvestment performance including both price appreciation and income (dividends/interest).