What is tax-loss harvesting and should I do it?
Quick Answer
Tax-loss harvesting means selling investments at a loss to offset capital gains or income. You can deduct up to $3,000 in net losses against ordinary income each year, with excess losses carrying forward. The key is replacing the sold investment with something similar (but not "substantially identical") to maintain market exposure.
Tax-loss harvesting is one of the few free lunches in investing. Let me explain how it works.
What's substantially identical? - Same stock: Yes (can't sell Apple and buy Apple within 30 days) - Same index fund from different providers: Probably yes - Different index tracking similar markets: Probably no (S&P 500 vs. Total Stock Market is usually fine)
**Is it worth it?** For larger portfolios, yes. A $10,000 harvested loss at a 32% marginal rate saves $3,200 in taxes. Over time, these savings compound. The key is maintaining discipline and not letting tax considerations override good investment decisions.
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