Tax loss harvesting is a smart strategy that can help you reduce your taxable income by offsetting capital gains with losses from underperforming investments.
Here’s how it works:
If a stock or security in your portfolio drops in value, you can choose to sell it at a loss. That realized loss can then be used to offset other gains—or even reduce your ordinary income—when you file your taxes. To keep your portfolio balanced, you can replace the sold investment with a similar one (but not identical, to avoid violating the IRS “wash-sale” rule).
Example:
Let’s say you purchased $150 worth of Starbucks stock, but over time, it declines in value to $90. You decide to sell it, locking in a $60 capital loss. You then reinvest in a similar company—say Dunkin' Donuts—to maintain your investment exposure. Come tax season, you report the $60 loss to the IRS, and your taxable income is reduced by that amount.
💡 Pro Tip: While tax loss harvesting can be helpful, it’s best used as part of a broader tax strategy. If you’re unsure whether it’s right for you, consider speaking with a tax professional.