What is tax-loss harvesting and how does it affect my investment returns?

What is tax-loss harvesting and how does it affect my investment returns?

Tax-loss harvesting is a strategy where you sell investments at a loss to offset capital gains taxes. This can improve your overall investment returns by reducing your tax liability.

Can you give me an example of how it works?

Sure! If you sold a stock for a $5,000 gain but also sold another for a $2,000 loss, you can offset the gain with the loss, reducing your taxable income.

Are there any risks involved with tax-loss harvesting?

Yes, one risk is the wash-sale rule, which disallows the deduction if you repurchase the same security within 30 days. It's important to be mindful of this.

How often should I consider tax-loss harvesting?

It's typically done at the end of the tax year, but you can also consider it throughout the year if your investments fluctuate significantly.