tax-loss harvesting

The use of realized losses to offset realized gains, lowering taxes for the current year and potentially future years, too. This can be done in taxable investment accounts only. Capital losses can be used to offset both short-term and long-term gains. However, losses must first be used to offset like gains—i.e., short-term losses offset short-term gains and long-term losses offset long-term gains. Offsetting short-term gains with short-term losses normally provides a bigger benefit than offsetting long-term gains for tax-loss harvesting purposes. This is because short-term losses are first applied against short-term gains, which are normally taxed at higher marginal tax rates. Capital losses cannot be used to offset income from qualified dividends, even though they are taxed at the same rate as long-term capital gains. Investors are also prohibited from using capital losses to offset income from conversions of money moved out of traditional individual retirement accounts (IRAs) into Roth IRAs and income from required minimum distributions (RMDs).