Key Term

What is Tax Loss Harvesting?

Definition

Tax loss harvesting is a strategic investment technique where investors sell securities at a loss to offset capital gains tax liability on other investments that have appreciated in value. This practice allows investors to reduce their taxable income while maintaining their overall investment strategy by reinvesting the proceeds in similar, but not identical, securities to avoid wash sale rules.

Significance

In charitable giving, tax loss harvesting can be a powerful tool for maximizing philanthropic impact while managing tax efficiency. By strategically harvesting losses, donors can offset gains in other areas of their portfolio, potentially freeing up more resources for charitable contributions. This technique is particularly valuable when coordinated with charitable giving strategies such as donor-advised funds or direct stock donations, allowing donors to optimize both their tax situation and their charitable impact. Many sophisticated philanthropists use tax loss harvesting as part of their overall giving strategy, especially during market downturns when opportunities for harvesting losses may be more abundant.