What is Tax-Loss Harvesting?
Tax-loss harvesting involves selling investments at a loss to offset capital gains realized elsewhere in your portfolio. In Japan, realized losses on listed securities can offset gains and dividends in the same year, with unused losses carried forward for three years. In the US, up to $3,000 in net losses can offset ordinary income annually. This strategy converts paper losses into concrete tax savings.
How to Execute
Near year-end, review your portfolio for positions with unrealized losses. Sell those positions to realize the loss, then reinvest in a similar but not identical investment to maintain market exposure. In the US, the wash sale rule prohibits repurchasing a substantially identical security within 30 days. In Japan, same-day buy-sell transactions may not qualify for loss offset, so wait at least one business day before repurchasing.
Important Caveats
Tax-loss harvesting is tax deferral, not tax elimination. The repurchased investment has a lower cost basis, creating a larger taxable gain when eventually sold. However, deferring taxes allows the full pre-tax amount to continue compounding, providing a time-value benefit. Losses in tax-exempt accounts like NISA or Roth IRA cannot be harvested. The strategy is most valuable for high-income investors in upper tax brackets.