Tax loss harvesting is an essential component of tax-aware portfolio management, yet it is often misunderstood. Many investors and even some professionals still view it as a year-end exercise. In reality, markets create loss opportunities throughout the year, and capturing them requires a systematic approach. For wealth advisors managing complex taxable portfolios, harvesting is not a seasonal task but a year-round discipline that demands precision, compliance, and integration with broader objectives.
What Tax Loss Harvesting Involves
Tax loss harvesting is the sale of securities that have declined in value to realize a capital loss. These losses can:
- Offset realized capital gains in the same tax year
- Offset up to $3,000 of ordinary income annually under IRS limits
- Carry forward indefinitely to reduce future gains
To maintain market exposure, proceeds are typically reinvested into similar but not substantially identical securities. This reinvestment step introduces complexity, as the IRS imposes specific restrictions on replacement securities.
Timing: Why It Should Not Be a Year-End Event
Historically, many investors considered December the right time for harvesting. However, waiting until year-end can mean missing earlier opportunities created by market volatility. The New Jersey Society of CPAs stresses that tax loss harvesting should be viewed as an all-year obligation, not a last-minute exercise, because unrealized losses can disappear as markets recover (NJCPA).
Below is a comparison of year-end versus ongoing harvesting:
| Approach | Timing | Advantages | Limitations |
| Year-End Only | December | Simple to implement, easy to schedule | Misses earlier opportunities, concentrated activity |
| Ongoing/Periodic | Throughout the year | Captures losses as they occur, more tax-efficient | Requires monitoring, operational complexity |
Compliance and the Wash-Sale Rule
One of the most significant risks in harvesting is non-compliance with the IRS wash-sale rule. Under IRS Publication 550, a realized loss cannot be deducted if the investor buys a substantially identical security within 30 days before or after the sale.
Advisors must track activity across:
- Individual taxable accounts
- IRAs and other retirement accounts
- Spousal and household-linked accounts
Even an automatic dividend reinvestment or a trade in a related account can trigger a wash sale, disallowing the loss and undermining the strategy.
Integrating Harvesting Into a Broader Framework
The CFA Institute highlights that harvesting should be coordinated with other elements of tax-aware investing, including asset location and withdrawal strategies (CFA Institute). Without integration, short-term tax benefits can be offset by long-term inefficiencies.
Factors to evaluate include:
- Client’s current and projected tax bracket
- Interaction with rebalancing policies
- Impact of reduced cost basis on future gains
- Tracking error introduced by substitute securities
A rules-based process that considers these variables helps ensure harvesting aligns with long-term objectives rather than creating unintended consequences.
Risks and Operational Challenges
Tax loss harvesting introduces trade-offs that advisors must weigh carefully:
- Transaction costs: Increased turnover can erode net benefit
- Liquidity considerations: Large block trades in thin markets may create price slippage
- Behavioral risk: Clients may perceive harvesting as market timing rather than tax management
- Portfolio drift: Replacement securities can create small deviations from intended exposures
These risks reinforce the importance of disciplined execution supported by technology and compliance oversight.
The Aris Perspective
At Aris, we view tax loss harvesting as a process rather than an event. Effective implementation requires systematic monitoring, operational infrastructure, and integration with a broader tax-aware strategy. Advisors who move beyond year-end harvesting to structured, year-round practices can better position their clients for consistent, tax-efficient outcomes without compromising portfolio integrity.
Disclosures: This material is for informational purposes only and does not constitute tax, legal, or investment advice. Past performance is not indicative of future results. While information in this content comes from reliable sources, no guarantee of accuracy or completeness is provided. The content is not intended as financial advice or a solicitation for securities transactions. Forecasts reflect current conditions, may change, and are not assured to occur. Tax laws and regulations are subject to change, and their application depends on individual circumstances. Clients should consult a qualified tax adviser before implementing any strategy. The opinions expressed herein are subject to change at any time without notice.
