Tax-Loss Harvesting
Definition
Selling investments at a loss to offset capital gains taxes on your winners. If you made $5,000 on one stock and lost $3,000 on another, selling the loser means you only owe taxes on $2,000 net gain. You can even deduct up to $3,000 in net losses against ordinary income.
Why It Matters
Tax-loss harvesting can save hundreds or thousands annually. It's essentially turning lemons into lemonade — your losing investments reduce your tax bill. Many robo-advisors do this automatically. Just watch the wash-sale rule (can't rebuy the same investment within 30 days).
Example
You have $10,000 in gains from selling Fund A. You also hold Fund B, which is down $4,000. Sell Fund B: you now owe taxes on only $6,000. Buy a similar (but not identical) fund to stay invested. You saved taxes without changing your strategy.