Describe tax-loss harvesting and when it makes sense.

• A. Sell investments at a gain to offset losses for tax purposes.
• B. Sell investments at a loss to offset gains for tax purposes; beneficial when gains exist or to manage overall tax liability.
• C. Harvesting losses should be used regardless of market conditions.
• D. Tax-loss harvesting guarantees higher after-tax returns.

Answer: (B)

Tax-loss harvesting is the practice of selling investments that have fallen in value to realize a loss for tax purposes, with the goal of offsetting realized gains and lowering your overall tax bill. It’s most effective in a year when you have gains to offset, because the losses can directly reduce capital gains taxes. If gains are smaller than losses, you can use the losses to offset those gains and then deduct up to $3,000 of the remaining net loss against ordinary income each year, with any unused losses carried forward to future years. A key consideration is the wash-sale rule: you can’t claim a tax deduction if you buy the same or substantially identical security within 30 days before or after the sale. To stay compliant, you may substitute with a different asset or wait to repurchase. While tax-loss harvesting can improve after-tax returns under the right circumstances, it’s not guaranteed and should be weighed against transaction costs, the potential for missed market rebounds, and your overall investment strategy.