What is the strategy of "tax-loss harvesting" used for?

Tax-loss harvesting is a strategy that involves selling securities that have experienced a loss to offset capital gains taxes on other investments that have been sold at a profit. The fundamental principle behind this strategy is that realized losses can be used to reduce the taxable income from capital gains, effectively minimizing the overall tax liability for the investor.

By selling a security for less than its purchase price, the investor recognizes a loss, which can be used to offset any gains realized in the same tax year. This means that if an investor sold one stock at a profit and another at a loss, the loss can counterbalance the profit, reducing the amount of capital gains tax owed.

Utilizing tax-loss harvesting strategically can be beneficial in managing tax obligations and improving after-tax investment returns, making it a common practice among investors who are actively managing their portfolios.