Market turbulence tends to generate anxiety among investors, but for high-net-worth families with taxable accounts, volatility can also open a planning window that’s rarely accessible in calmer markets.
During volatility, tax-loss harvesting opportunities can be meaningful, especially during periods like 2025, when more than 400 individual S&P 500 stocks experienced drawdowns of 5% or more at some point during the year.
Tax-loss harvesting doesn’t benefit everyone equally, nor does it guarantee tax savings; however, when executed properly as part of a broader financial plan, it can help turn market discomfort into better outcomes.
What Is Tax-Loss Harvesting?
Tax-loss harvesting is the practice of selling a security that has declined in value to realize a capital loss, which may then be used to offset capital gains elsewhere in your portfolio, potentially reducing your taxable income for the year. If your realized losses exceed your realized gains, the IRS allows you to apply up to $3,000 of the net loss against ordinary income, with any remaining losses carried forward to future tax years.
Importantly, tax-loss harvesting doesn’t eliminate taxes permanently; in most cases, it defers them. When you sell a losing position and reinvest the proceeds, your new position carries a lower cost basis, which may result in a higher taxable gain when you eventually sell it. The potential benefit comes from the time value of money: deferring taxes today leaves more capital invested and compounding in the near term.
Research from Vanguard found that tax-loss harvesting alpha, or the additional after-tax return generated through strategic loss harvesting, can range from 0.47% to 1.27% annually for investors using direct-indexed portfolios with continuous monitoring. Where you fall in the range depends on your tax rate, the volatility of the portfolio, and how systematically the harvesting is implemented.
Why Volatile Markets May Create More Opportunity
A rising market offers few chances to harvest losses because most positions are sitting at a gain. During volatility, individual stocks and funds may dip meaningfully even within an otherwise positive year, creating short windows where losses can be realized without abandoning the investment thesis or long-term allocation.
According to J.P. Morgan Asset Management’s analysis, in 2025 over 400 stocks, or close to 80% of the S&P 500 index, experienced a drawdown of at least 5% at some point during the year, even though many finished the year in positive territory. The dispersion between intra-year lows and year-end values creates opportunities for tax-loss harvesting.
The Wash-Sale Rule: A Key Tax-Loss Harvesting Consideration
The IRS wash sale rule is the primary constraint on tax-loss harvesting strategies. You generally need to avoid buying the same or substantially identical security during the 30 days before and 30 days after the sale. After 31 days following the sale, you may be able to repurchase it.
The rule can apply across multiple accounts, including IRAs and potentially accounts tied to a spouse. Buying back a losing position in your IRA after harvesting the loss in your taxable account does not preserve the deduction, and in a tax-deferred account, the disallowed loss may be permanently forfeited rather than simply deferred.
The “substantially identical” standard is also not always clear-cut. Selling one S&P 500 ETF and immediately buying a different S&P 500 ETF from a different provider may still trigger the rule. The safer approach is typically to rotate into a correlated but distinct security, such as a fund tracking a different index, to maintain market exposure while the 30-day window passes.
Given these complexities, working with a tax-aware wealth advisor can help reduce the risk of triggering the rule inadvertently, particularly for investors managing multiple accounts.
Coordinating Tax-Loss Harvesting within Your Broader Plan
Tax-loss harvesting is most effective as one component of a coordinated, proactive tax strategy that accounts for your income, estate planning goals, charitable giving, and investment horizon. Harvesting losses without considering the full tax picture may create unintended consequences, including disrupting long-term holdings, affecting qualified dividend treatment, or generating short-term gains that are taxed at ordinary income rates.
At SignatureFD, we integrate tax-aware investment strategies with a whole-picture view of each client’s financial life. Market volatility may create discomfort, but with the right planning, it can also open up powerful planning opportunities.
If you’re wondering whether tax-loss harvesting makes sense for your portfolio, financial plan, and long-term goals, let’s talk. Get in touch with our team here.
Frequently Asked Questions
Is tax-loss harvesting only relevant at year-end? Year-end reviews are common, but they may not capture the most valuable opportunities. Volatility tends to create the deepest losses during earlier parts of the year, and waiting until December may mean those windows have already closed.
Does harvesting a loss mean I have to sell a position permanently? Not necessarily. After the 31-day wash sale window has passed, you may repurchase the same security if you choose to. The key is waiting out the 61-day window before rebuying the same or a substantially identical investment.
Can tax-loss harvesting offset ordinary income? Up to $3,000 of net capital losses can be applied against ordinary income per year. Losses beyond that threshold carry forward to future tax years and may be used to offset future gains or ordinary income.
Does tax-loss harvesting make sense for everyone? It depends on your tax situation, account types, and investment strategy. Investors in lower tax brackets, those with primarily tax-deferred accounts, or those with limited realized gains may see less benefit. Start with a conversation with your advisor.
This article is for informational purposes only and does not constitute tax advice. Please consult your financial advisor and/or CPA before making any tax-related decisions.
