(NewsNation) — Sometimes, losing can mean winning in the world of investing.
Tax-loss harvesting offers a little-known but effective way to turn losses into financial gains, saving you on tax returns come tax season.
This is tax-loss harvesting explained.
What is tax-loss harvesting?
Tax-loss harvesting is an investing strategy to lower taxes and potentially increase after-tax returns.
If your capital losses exceed your capital gains in your investment portfolio, the monetary difference can be applied to your tax return to lower your taxable income by up to $3,000, according to the Internal Revenue Service.
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When you sell a stock or bond, the difference between what you paid versus what you sell it for is a capital gain or a capital loss.
When you sell a capital asset, the difference between the adjusted basis in the asset and the amount you realized from the sale is a capital gain or a capital loss.
The process of tax-loss harvesting includes selling investments for less than what you paid, using those losses to offset gains in other investments and buying a new similar investment to stay in the market.
Tax calculator: How much do I owe in taxes?
“This last point is critical—it’s what distinguishes this powerful tax strategy from trying to time the market or locking in losses, and it provides the potential for increasing after-tax returns,” according to Vanguard, an investment management company.
The process can be complicated, so consult with an investing professional if needed.
