What is Tax Loss Harvesting?

As we get to the end of the calendar year, there'll be a lot of advice online about saving money on taxes.

And so you will hear a number of advisors and accountants talk about a strategy called tax loss harvesting.

But most people don't know what tax loss harvesting is.

It turns out it's a pretty simple concept.

When you sell a security for a gain, you owe taxes on that capital gain.

But if you have a loss and you sell the security, the IRS lets you write off that loss against other gains or in some cases income to help save you money on taxes.

Tax loss harvesting is the basic idea of looking across your portfolio and looking to see if there are securities you could sell for a loss to make up for gains that you've taken that year or to save you a little bit on your taxes overall against income.

That's all it is.

Now, the hard part about tax loss harvesting is that there's a rule called the wash sale rule, which says that if you sell a security, you can't buy it back for 30 days.

For most people, that's fine.

In many cases, when you sell a security at a loss, there are better investments out there for you in the future and many people don't buy the same security back at all.

But if you do want to replace that security in your portfolio, you can look for a security that has similar performance characteristics, but isn't the same security by IRS standards.

Now that's a little hard to do when you're talking about companies because Coca-Cola and Pepsi aren't really the same business and may perform differently.

But if you have index funds, it's actually pretty simple because you can sell the Vanguard Emerging Markets Fund and buy the Charles Schwab Emerging Markets Fund and those are different securities from different vendors with different indices that they follow.