Tax loss harvesting is a way to be proactive about minimizing the amount of taxes due from investments. It’s a strategy that leverages capital losses from profitable investments to reduce taxable gains. To use the strategy, an investor would sell an asset or security at a net loss and reinvest that loss into a similar asset or security, retaining the overall portfolio balance.

The method is advantageous for long-term investors who want to reduce the tax impact of gains, because the losses can be used to offset any capital gains tax they might owe at the end of the year. Tax loss harvesting isn’t a tax avoidance strategy; instead, it’s designed to make the most of your current tax situation.

The Internal Revenue Service has rules in place that investors must adhere to in order to benefit from tax loss harvesting. One such requirement is that investments must not be “substantially identical” to the original investment within 30 days of the sale. This means investors need to exercise careful judgment when reinvesting in similar assets.

For example, if an investor is using tax loss harvesting to offset a gain from stocks, that investor must avoid buying the same stocks during the 30-day period after the sale. The investor could instead purchase a related stock, or a stock in the same sector, or put the proceeds into a diversified mutual fund.

Tax loss harvesting is a lucrative way to make the most of your current tax situation, especially for long-term investors who are accumulating large capital gains. The strategy can reduce the total amount of taxes due and help to shrink the tax burden of investments over time. However, investors should proceed with caution and be sure to comply with any IRS rules and regulations pertaining to the process.