QUESTION:
What is tax-loss harvesting, and how is it used as a strategy by investors?
ANSWER:
Tax-loss harvesting is a strategy used by investors to reduce their taxable income by selling investments that have declined in value. By realizing losses, investors can offset capital gains from other investments, lowering their overall tax bill.
The losses can also be used to offset up to $3,000 of ordinary income annually, with any remaining losses carried forward to future years. This technique helps investors optimize after-tax returns, especially in volatile markets, by strategically managing their investment portfolios to minimize tax liabilities while maintaining their investment goals.