Tax-loss harvesting is too valuable to limit to a single season. If you wait until year-end, you might miss the best opportunities to reduce taxes and improve after-tax returns. You can unlock its full potential by viewing tax-loss harvesting as a year-round strategy.
Let’s explore why timing matters, how to implement tax-loss harvesting throughout the year, and what traps to avoid.
THE BASIC IDEA
Tax-loss harvesting involves selling an investment that has declined in value, realizing a capital loss, and replacing it with a similar—not identical—investment. The loss can offset gains realized elsewhere in your portfolio or reduce your taxable income by up to $3,000 annually. Any unused losses can be carried forward indefinitely.
This strategy helps reduce your tax bill without altering your overall investment plan. It can be a smart way to use the market’s natural volatility to your advantage.
WHY DECEMBER-ONLY HARVESTING FALLS SHORT
Tax-loss harvesting in December might seem logical. That’s when investors begin focusing on tax preparation. Here are some problems with this last-minute approach.
Markets may have recovered: Assets in the red earlier in the year could rebound before December, eliminating the loss and the opportunity to harvest it.
Crowded trades: When many investors sell at once, bid-ask spreads can widen, reducing the value of your trades.
Administrative crunch: Advisors and custodians are often overwhelmed in December. That can slow execution and lead to errors.
Wash sale risk: If you re-buy a security sold for a loss within 30 days, the IRS disallows the loss. This is harder to manage during the holidays when year-end rebalancing and tax-loss harvesting collide.
A better approach is to treat tax-loss harvesting as an ongoing opportunity.
THE CASE FOR YEAR-ROUND TAX-LOSS HARVESTING
Markets fluctuate constantly. That means opportunities to harvest losses can arise at any time. Year-round harvesting takes advantage of this volatility.
Here’s how a more active approach can help:
Capture losses when they occur: Harvest those losses immediately if markets dip in March or July. Waiting could mean missing out.
Increase after-tax returns: Research indicates proactive tax-loss harvesting can add as much as 0.85% annually to after-tax returns for taxable investors with balanced portfolios.
Smooth your tax bill: Regular harvesting helps preserve capital losses. These can offset gains in strong years and reduce the volatility of your tax liability.
Support rebalancing: When you harvest a loss, you can simultaneously rebalance your portfolio, keeping your allocations on track.
HOW TO HARVEST LOSSES STRATEGICALLY
To make year-round tax-loss harvesting practical, you need a system. Here are the key components:
Monitor regularly: Losses don’t linger. Monitor your portfolio frequently, using automated alerts or technology to flag securities with unrealized losses that exceed a threshold, like 5 to 10 percent.
Pair with replacement securities: Always have a list of suitable replacements that preserve your asset allocation and risk profile. For example:
If you sell Vanguard Total Stock Market ETF (VTI), consider replacing it with iShares Core S&P Total U.S. Stock Market ETF (ITOT).
If you sell iShares MSCI EAFE ETF (EFA), look at SPDR Portfolio Developed World ex-US ETF (SPDW).
These replacements should track similar indices but not be “substantially identical,” which would trigger the wash sale rule.
Avoid the wash sale rule: The IRS disallows a loss if you buy the same or a substantially identical security within 30 days before or after the sale. Watch for this in all accounts, including IRAs and your spouse’s accounts. Automated tools like Betterment and Wealthfront include wash sale avoidance features, but you can also manage this issue manually.
Maintain investment discipline: Never harvest a loss just to lower your tax bill. Stay invested. Choose a replacement that keeps your overall strategy intact. Tax considerations should never come at the expense of sound portfolio construction.
WHEN NOT TO HARVEST LOSSES
Tax-loss harvesting doesn’t make sense for every investor. If you are in a low tax bracket, already have more losses than you can use, or plan to sell an asset shortly, harvesting may be counterproductive.
In tax-deferred accounts like IRAs and 401(k)s, tax-loss harvesting has no benefit because gains and losses are not taxable until withdrawal.
Finally, avoid harvesting losses if it requires you to exit a position you believe will strongly rebound unless you have a suitable alternative.
A NOTE ON QSBS GAINS UNDER THE NEW LAW
The One Big Beautiful Bill Act, passed on July 4, 2025, made important changes to the treatment of Qualified Small Business Stock (QSBS). Investors can now exclude 50% of the gain on eligible QSBS held for 3 years. That exclusion rises to 75% after 4 years and 100% after 5 years. The prior 5-year minimum for full exclusion still applies to stock acquired before the new law.
The size of corporations eligible to issue QSBS to investors has increased from $50 million of gross asset value to $75 million of gross asset value, with a new inflation adjustment to increase that amount each year.
The cap on the maximum amount of capital gain excludable from the QSBS of a single issuer has been increased from $10 million to $15 million, with an inflation adjustment.
These changes may influence your loss-harvesting strategy. If you’re holding QSBS close to a key holding period milestone, you may want to avoid realizing offsetting losses that could reduce your need to use the QSBS exclusion.
Timing matters more than ever when navigating capital gains and losses.
Talk to a tax advisor if QSBS is part of your portfolio.
TOOLS AND TECHNOLOGY
Many advisory firms and robo-advisors now offer automated tax-loss harvesting. These platforms continuously scan portfolios, identify opportunities, and execute trades. They also help manage wash sale risk and maintain target asset allocations.
If you are a do-it-yourself investor, consider using portfolio tracking tools that alert you when a position falls below your loss threshold. Automation is no substitute for thoughtful oversight. Review your trades periodically to confirm they align with your long-term goals.
THE HIDDEN BENEFIT: BEHAVIOR MANAGEMENT
There’s an overlooked psychological benefit to year-round tax-loss harvesting.
When markets fall, many investors feel helpless or fearful. Harvesting a loss turns that market decline into something useful. It gives you a sense of control and reinforces long-term thinking, which can reduce the temptation to sell in a panic or abandon your strategy.
HOW ADVISORS ADD VALUE
Advisors who proactively monitor portfolios for loss harvesting opportunities can significantly improve after-tax returns. Their value goes beyond taxes. Advisors also help:
- Maintain portfolio discipline
- Avoid wash sales
- Choose appropriate replacement securities
- Coordinate harvesting across multiple accounts
- Integrate harvesting into broader tax and financial planning
These services are worth far more than the tax savings for affluent investors with complex portfolios.
THE BOTTOM LINE
Tax-loss harvesting is not a December activity. It’s a dynamic, ongoing process that requires vigilance, discipline, and strategy. Done correctly, it can reduce your taxes, improve long-term returns, and help you stay the course during turbulent markets.
Disclaimer: There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. All investing involves risk, including loss of principal. No strategy ensures success or protects against loss.