Tax-Loss Harvesting (TLH)

When a security's market value falls below its cost basis, the original purchase price, adjusted for certain events, selling it crystallizes a capital loss. That loss can then be used to reduce taxable gains realized elsewhere in the portfolio, lowering the current tax bill. The investor typically reinvests the proceeds in a similar but not identical security to maintain market exposure. The key constraint is the wash-sale rule, which disallows the loss if the same or a substantially identical security is repurchased within a defined window.

For families with large, actively managed portfolios, systematic tax-loss harvesting can meaningfully improve after-tax returns over time: not by avoiding taxes permanently, but by deferring them. A hypothetical family that sold a diversified equity position at a loss during a market downturn, then reinvested in a comparable holding, could use that realized loss to offset gains from a business sale in the same tax year.

A common misconception is that harvesting losses is always beneficial. If the replacement security performs differently, tracking error can erode the benefit. Additionally, deferred gains must eventually be recognized, and future tax rates are unknown. Families should explore this topic in the context of portfolio-level tax management and work with a qualified CPA to evaluate whether and how the strategy applies to their situation.