The practice of selling investments at a loss to realise a tax deduction, then reinvesting in a similar (but not identical) position to maintain market exposure.
Deeper Explanation
Tax-loss harvesting converts unrealised losses into immediate tax benefits while maintaining the portfolio's overall risk exposure. The harvested losses offset capital gains elsewhere in the portfolio, reducing the current year's tax bill. The wash-sale rule (in many jurisdictions) prohibits buying back the same or "substantially identical" security within 30 days of the sale — requiring reinvestment in a correlated but different security. The benefit of tax-loss harvesting compounds significantly over time: tax savings reinvested at the portfolio's expected return create a meaningful long-term performance advantage. It is most valuable for high-bracket investors with significant unrealised gains elsewhere in their portfolio.
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