Tax-loss harvesting
What it is: deliberately selling losers to realise the loss, using it to cancel out gains you have already taken.
Why it works: tax is owed on NET gains. A $12,000 gain and an $8,000 realised loss is a $4,000 taxable event. The loss is real money back, and you can usually reinvest in something similar immediately.
The mechanics:
• Losses offset gains of the same type first, then the other type
• Excess losses offset ordinary income up to an annual cap
• Anything left over carries forward indefinitely
• You must avoid the wash sale rule — buy something *similar*, not substantially identical
The honest caveat: harvesting lowers your cost basis, so you are often deferring tax rather than avoiding it. Deferral is still worth real money, but it is not free.
Only possible in a taxable account.