Tax-loss harvesting is a strategy used to minimize the amount of taxes an investor pays on their capital gains. It involves selling an investment that is currently worth less than its original purchase price (a "loss") to offset the gains realized from another investment.
How It Works
If you sell Stock A for a $5,000 profit and Stock B for a $5,000 loss, your net capital gain is zero. You pay no capital gains tax on that profit. This is effectively a "tax subsidy" for your losing positions.
The Wash Sale Rule
To prevent investors from selling a stock just to claim the loss and immediately buying it back, the IRS enforces the Wash Sale Rule. If you buy the same security (or one that is "substantially identical") within 30 days before or after the sale, the loss is disallowed for tax purposes.
Strategic Swapping
Advanced investors often "harvest" a loss by selling an ETF (like VOO) and simultaneously buying a similar but not identical ETF (like IVV). This maintains their market exposure while still allowing them to claim the tax loss.
Year-Round Strategy
While many people think of tax-loss harvesting only in December, it can be done year-round. Market volatility often presents opportunities to "bank" losses that can be used to offset future gains.
DivAgent Educational Standards
This definition is part of the DivAgent Income Academy curriculum. Our glossary is designed to bridge the gap between institutional jargon and retail investor understanding. Each term is reviewed by our Research Team for accuracy, specifically in the context of:
- Tax implications (Ordinary vs. Qualified)
- Impact on Total Return calculations
- Relevance to Option-Income strategies
- Risk assessment in a retirement portfolio
*While we strive for precision, financial terminology can evolve. Always verify definitions with official regulatory sources (SEC, IRS) when making tax or legal decisions.