Bank of America's clients are selling stocks 80% more than normal to use this strategy that allows you to avoid capital gains taxes on big returns

• The biggest money managers on Wall Street are shedding billions in stocks for this one tax strategy.
• Tax-loss harvesting allows investors to offset capital gains taxes by selling securities at a loss.
• Here's what you need to know about using a tax-loss harvesting strategy.

It's officially stock-selling season, according to Bank of America.

Institutional investors usually increase their selling activity towards the end of the year, and this year was no exception. Bank of America's clients alone sold $1.3 billion in US equities last week. The bank reported that institutional selling activity was 80% higher this October than the historical average.

What's the reason behind these elevated levels of security selling? The answer is tax-loss harvesting.

Tax-loss harvesting has long been a strategy of Wall Street and the wealthy to reduce their tax bills. They do this by selling underperforming investments for a loss to offset capital gains taxes on other investments sold at a profit. As a result, taxes are only paid on the net profit.

You can replicate this strategy in your own portfolio, too. Below are some tips and tricks on how to use it to reduce your taxes, according to Jere Doyle, estate planning strategist at BNY Wealth.

How tax-loss harvesting works

Investors might look to rebalance some portfolio positions as the end of the year approaches. For example, after this year's incredible runup in tech stocks, some investors might be looking to sell their positions to realize their gains and diversify their holdings.

That's where tax-loss harvesting comes in. If you're selling Nvidia stock with a $10,000 gain, you can pair that with a sale of another asset with a $10,000 loss to avoid paying capital gains taxes.

You can also front-load your losses, according to Doyle. If you sell one asset at a $10,000 gain and another at a $15,000 loss, you can use up to $3,000 of the loss to offset other ordinary income — and carry forward the remaining $2,000 to subsequent years.

Tax-loss harvesting can be especially advantageous in today's environment, according to Doyle.

The market has been experiencing heightened volatility from factors such as mega-cap earnings and the election.

This environment creates big winners and losers, giving investors plenty of opportunity to recognize losses. Investors shouldn't be scared of pullbacks in a volatile market. Instead, take advantage of price dips in the market to sell losing securities and lower your tax bill.

Tax-loss harvesting tips and tricks

There are a few things to consider before using a tax-loss harvesting strategy.

First, investors should be aware of the wash-sale rule. The wash-sale rule states that if you sell a security at a loss and buy the same or "substantially identical" security in a 30-day timeframe before or after the sale, you cannot use the loss for income tax purposes.

Sometimes, people forget about this rule. "They made the mistake of repurchasing those same assets within that 61-day period, and they lose the deductibility of loss," Doyle said.

If you want to sell a security at a loss but still want exposure to a specific area of the market, you can use the proceeds of the sale to purchase a similar, but not substantially identical, asset. However, the IRS hasn't provided a clear definition of what constitutes a substantially identical asset, so investors should approach this with caution. Or, you could double down on the asset more than 30 days before selling at a loss.

Another piece of advice Doyle: try to match your gains and losses.

It might be tempting to record a larger loss than gain to carry it over in subsequent years, but it might not be worth taking the loss if you don't plan to use it for tax-harvesting purposes in the near future.

"Given the time value of money, those long-term capital gain losses lose their value over a period of time," Doyle said. A $2,000 loss today will be worth less carried over many years in the future — in that case, it would be more advantageous to just record the loss in the future. In other words, don't incur excessive losses today just to be able to use them in the future.

Lastly, Doyle recommends thinking through this strategy carefully to make sure it's a good fit for your current portfolio.

"From an investment point of view, it may not make sense. Maybe the securities you have at a loss are going to bounce back later on. Maybe the securities you're selling at a gain have future appreciation left," Doyle said.

Investors should keep in mind that tax-loss harvesting isn't a one-size-fits-all strategy — but if you do have gains and the losses to offset them, the end of the tax year might be a good time to think about implementing this plan.