Navigating equity markets inevitably involves volatility. While unrealized losses can feel like deadweight in an investment account, in taxable brokerage portfolios, down positions can serve as a valuable tax-sheltering tool.
Tax-loss harvesting (TLH) is the deliberate practice of selling depreciated securities at a loss to neutralize realized capital gains dollar-for-dollar, offset up to $3,000 in ordinary income, and lower your annual tax bill. When executed correctly, harvested losses reduce current tax drag without pulling your portfolio out of the market, allowing unhindered compound growth over time.
Mechanics: The Order of Netting Capital Gains and Losses
The IRS requires capital gains and losses to be categorized by holding period and calculated following strict statutory netting rules: