What is a primary benefit of loss harvesting in tax deferral strategies?

Loss harvesting is a strategic practice in investment management that involves selling securities at a loss to offset gains realized from other investments. This allows investors to minimize their taxable income by using capital losses to offset capital gains, effectively reducing the amount of capital gains tax owed. When capital losses exceed capital gains, the excess losses can often be carried forward to future tax years or applied against ordinary income, subject to certain limitations.

The practice becomes particularly valuable in tax deferral strategies because it enables individuals to manage their tax liabilities more effectively. By strategically managing the timing of gains and losses, investors can optimize their tax situations, which can be a substantial contributor to overall investment returns over the long term.

This strategy does not involve maximizing any short-term gains, completely avoiding taxation, or directly reducing overall investment risk. Its primary function is to enable tax efficiency by leveraging capital losses to offset gains. This makes it an essential tool for investors seeking to enhance their after-tax returns.