What is tax-loss harvesting?

• A. Tax efficiency aims to minimize after-tax costs.
• B. Tax efficiency aims to maximize pre-tax returns.
• C. Tax efficiency guarantees no taxes.
• D. Tax efficiency only applies to high-income investors.

Answer: (A)

Tax-loss harvesting is a tax-management tactic that involves selling investments that have fallen in value to realize a loss, which can be used to offset gains from other investments. This reduces your current tax bill and can improve your after-tax return, rather than trying to push higher pre-tax returns. If your losses exceed gains, you can deduct a portion against ordinary income (in the U.S., up to a yearly limit) and carry the rest forward to future years. There’s also a wash-sale rule to avoid taking an immediate, virtually identical replacement within 30 days. This approach enhances tax efficiency, and it’s useful for many investors, not just those with high incomes. It doesn’t guarantee no taxes, and it isn’t about maximizing pre-tax returns.