Loss harvesting is a technique that takes advantage of unrealized losses and turns a negative into a positive. You acquire losses by selling investments (when appropriate) and accumulate them. When you sell another investment with a large capital gain, you can offset the gain against the harvested losses to pay little or no taxes. Outside a tax deferred account, buying a mutual fund is easy. But selling it and minimizing your tax bill can be a headache. Particularly when a partial sale occurs, planning can dramatically cut your tax bill.

Mutual fund investors get four options for determining their shares’ cost for tax purposes. They are: first in, first out (FIFO), average cost, average cost – double category, and specific identification. Specific identification allows you to choose which shares to sell and generally results in the lowest tax bite. You can recognize (and harvest) a loss that can be used to offset other gains.