What are the benefits of utilizing tax-loss harvesting?

Utilizing tax-loss harvesting provides several advantages, particularly in the context of minimizing capital gains taxes. This technique involves selling investments that have declined in value to generate capital losses, which can then offset capital gains realized from selling other profitable investments. By strategically realizing these losses, investors can lower their overall tax liability.

For instance, if an investor sells a stock for a gain, they can sell another stock that has lost value to offset that gain, potentially reducing the applicable taxes. This strategy is beneficial because capital gains are often taxed at a higher rate than ordinary income, so effectively managing and offsetting these can lead to significant tax savings.

In addition to mitigating tax liabilities, tax-loss harvesting can also help in maintaining a balanced investment portfolio by reevaluating and possibly reallocating funds into more promising investments after selling underperforming assets. This can improve an investor's overall portfolio performance while simultaneously benefiting their tax situation.