Tax-loss harvesting is the practice of selling an investment that has declined in value to realize a capital loss, which can then be used to offset capital gains from other investments — reducing your overall tax liability. If losses exceed gains, up to $3,000 of excess losses can be deducted against ordinary income annually, with additional losses carried forward to future years. After selling, investors typically reinvest the proceeds in a similar (but not 'substantially identical') security to maintain market exposure while capturing the tax benefit. The IRS wash-sale rule prohibits buying back the same security within 30 days before or after the sale.