Tax-Loss Harvesting: Where Good Intentions Go Bad
- Chagrin Valley
- Jul 1
- 4 min read
I want to take a slightly different approach to tax-loss harvesting and do more of an "inside baseball" than a high level overview. Before I do that, I'm going to slap an extra-bold disclaimer on this blog post that none of what you are reading is investment or tax advice. Yes, we are talking about both, but everyone's circumstance is unique and none of the below should be seen as broad recommendations.
Rather than spending time defining the strategy, I'm going to assume you're already familiar with the basics: tax-loss harvesting (TLH) involves selling an investment that has declined in value, realizing the capital loss, and reinvesting the proceeds into another investment that maintains the portfolio's intended market exposure.
The important point is this:
The investor hasn't changed their long-term investment strategy—they've simply captured a tax benefit that may otherwise have remained unrealized.
Or, put another way: making lemonade out of your lemons.
While the concept is relatively straightforward, successful execution is anything but. Here are four common mistakes and missed opportunities that even professional wealth managers and financial advisors can encounter.
Avoiding It Altogether
To be fair, tax-loss harvesting can become surprisingly complex, particularly when managing multiple accounts, household relationships, and varying tax circumstances.
As a result, many advisors default to a strict buy-and-hold philosophy and rarely harvest losses at all. Others outsource the responsibility to third-party managers offering "tax-aware" or "tax-sensitive" portfolios. While these solutions can be effective, they often lack the context of the client's broader financial picture.
Tax-loss harvesting doesn't exist in a vacuum. It should be coordinated with the investor's tax situation, charitable giving, concentrated positions, anticipated liquidity events, and long-term planning objectives.
Treating It as a December Exercise
You might be surprised how many professionals still view tax-loss harvesting as something that happens near year-end.
Certainly, harvesting losses in December is better than not harvesting them at all. But markets don't wait for the calendar.
Think back to 2025. A sharp decline during the first quarter was followed by a rapid recovery and ultimately new all-time highs. Investors who waited until December found few, if any, losses left to harvest.
The reality is that meaningful opportunities often appear during periods of market volatility, not during the final weeks of the year.
This becomes especially challenging for firms managing hundreds or even thousands of accounts. Without the appropriate systems and processes, only a handful of portfolios may receive the attention required to harvest losses when opportunities arise.
Creating Unnecessary Tracking Error
Once you've sold an investment at a loss, what comes next?
Under the wash-sale rules, you generally cannot repurchase the same or a substantially identical security for 30 days without jeopardizing the tax benefit.
That leaves two basic options.
The first is to remain in cash and repurchase the investment after the waiting period. While simple, this exposes the investor to the risk of missing a market rebound. If the investment appreciates significantly during those 30 days, portfolio performance may diverge from what it otherwise would have been.
This difference is known as tracking error.
The second option is to purchase a similar—but not substantially identical—investment during the waiting period. While this often reduces tracking error, it introduces a different challenge.
Tax-loss harvesting frequently occurs during periods of heightened market volatility, when emotions are elevated and recent performance can heavily influence decision-making.
Imagine selling a technology stock during a correction and deciding to temporarily purchase a large bank because "technology isn't working right now."
That's no longer tax-loss harvesting—it's market timing.
The replacement investment should be selected because it preserves the portfolio's intended exposure, not because current market conditions make it feel more comfortable.
Violating the Wash-Sale Rule
The wash-sale rule sounds relatively simple until you begin managing multiple accounts.
If you're managing a single taxable brokerage account, avoiding a wash sale is straightforward: sell the investment, purchase a suitable replacement, and avoid repurchasing the original security during the restricted window.
But the rule applies much more broadly than many investors realize.
It generally applies across all accounts owned by the taxpayer, including accounts managed on different platforms, and the restricted period spans the 30 days before the sale, the day of the sale, and the 30 days afterward.
Consider a married couple.
A loss is harvested in the husband's taxable brokerage account. Meanwhile, the wife's IRA—managed by a different advisor or platform—purchases the same security a week before or after the sale.
That seemingly unrelated transaction may eliminate the intended tax benefit.
Managing these interactions manually becomes increasingly difficult as households accumulate multiple accounts, retirement plans, custodians, and investment managers.
The complexity isn't limited to large advisory firms. It can exist within a single family.
A Process, Not a Tactic
Whether you manage your own investments or work with a professional advisor, tax-loss harvesting shouldn't be an occasional event or an afterthought.
It should be a clearly defined process.
The questions are simple:
How frequently are opportunities evaluated?
How are replacement securities selected?
How is tracking error managed?
How are wash-sale rules monitored across households and multiple accounts?
How does tax-loss harvesting fit into the broader financial plan?
If those questions don't have clear answers, the process probably deserves another look.
Tax-loss harvesting isn't an isolated tactic. It's one component of a broader tax-efficient investing framework. When executed thoughtfully and consistently, it can transform periods of market volatility into opportunities that support long-term, after-tax wealth creation.
