Technology Unleashes the Power of Year-Round Tax-Loss Harvesting
Tech advancements have made it possible to continuously monitor and rebalance portfolios, allowing for harvesting losses throughout the year rather than just once a year.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
As recent market performance has demonstrated, market declines can happen at any time of the year — making now a good time to consider tax-loss harvesting.
Tax-loss harvesting used to be simply too complex and challenging a task to take on regularly.
Today, however, technology has made it possible to continuously monitor and rebalance portfolios throughout the year, harvesting losses where present, while eliminating the need for investors to pore over complex spreadsheets.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
While there are tools available for individual investors, working with a professional can help maximize their efficiency, especially those with complex financial structures.
The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.
In its most basic form, tax-loss harvesting is when an investor sells assets that have fallen in value and uses those losses to offset gains from other assets. Those losses can be used in either the current or future calendar years.
Maintaining records is critical
It’s simple enough in concept. However, maintaining records for every tax lot (the record of the details of a given purchase of securities), including trade date, number of shares and average cost basis, can be overly complex and tedious for most individuals. But doing so is essential to conducting effective loss harvesting.
To illustrate the complexity of efficient tax-loss harvesting without tech help, consider a single portfolio consisting of 15 securities, each with 15 tax lots. Those 225 tax lots would need to be reviewed, most likely in a spreadsheet, prior to any rebalancing actions, assuming those actions were to be done tax efficiently.
Given that most investment managers typically oversee dozens or even hundreds of portfolios, continuously monitoring all portfolios for tax-loss opportunities would be almost impossible.
This is why tax-loss harvesting was rarely undertaken by anyone who didn’t employ a small army of dedicated, spreadsheet-wielding analysts. It’s also why many investors and advisers conducted tax-loss harvesting on an infrequent basis, often just once a year and typically in the fourth quarter.
Technology offers some help
However, technology has transformed the practice of tax-loss harvesting. New software tools allow investment managers to review portfolios on a daily basis without needing to manually sift through every individual tax lot.
Armed with better information, investment managers can now optimize the timing of tax-efficient portfolio actions.
The rise of new portfolio management technology has been accompanied by the proliferation of direct index strategies.
Direct index strategies provide investors with exposure to a specific index — for example, the S&P 500, the Russell 2000, etc.
However, unlike an index mutual fund or exchange-traded fund (ETF), where investors own shares of the fund, with a direct index, investors own the individual constituents of the index.
Doing so results in potentially hundreds of tax lots within a portfolio. With newer portfolio management systems, that becomes advantageous from a tax-efficiency standpoint.
In 2024, the Magnificent 7, or Mag 7 stocks — Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), Amazon.com (AMZN), Meta Platforms (META), Tesla (TSLA) and Nvidia (NVDA) — accounted for over half of the S&P 500’s 23% return.
As a result of their strong performance, the Mag 7 accounted for roughly 35% of the entire S&P 500 at year-end. Among the other 493 stocks in the S&P 500, many underperformed or even experienced outright declines.
Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.
With a direct index, investors can participate in the strong growth of the Mag 7, or any other stocks driving market performance.
At the same time, because they own the underlying stocks in the index, and not shares of a single fund, they can easily harvest the losses of underperforming companies to tax-efficiently rebalance their portfolios.
Mitigating risk and improving tax efficiency
Even in situations where one or more large concentrated holdings are throwing the balance of an investor’s portfolio out of alignment, investors are sometimes reluctant to sell because of the tax implications.
But tax-loss harvesting and the software tools to analyze it can make a sale more palatable in these cases.
Consistent and ongoing rebalancing across your portfolio can help mitigate risk and improve tax efficiency, while maintaining proper diversification.
By continually harvesting losses and using them to offset gains in other areas of the portfolio, an investor can lessen the tax liability that would undoubtedly build over time.
Active tax management is a change in the way portfolios have traditionally been managed. However, with improvements in technology, it is practical to do in portfolios of all sizes.
If you are not currently taking advantage of these new technologies, and their inherent benefits, it’s time.
This content is for informational purposes only and does not constitute legal or tax advice. Please consult your legal or tax advisor for specific guidance tailored to your situation. First Western Trust Bank cannot provide tax advice. Please consult your tax advisor for guidance on how the information contained within may apply to your specific situation.
Related Content
- How Selling a Losing Stock Position Can Lower Your Tax Bill
- How Tax-Loss Harvesting Helps to Lower Your Tax Bill
- Six Biggest Mistakes Made on Retirees’ Tax Returns
- 10 Tax Forms Retirees Receive and What They Mean
- Types of Income the IRS Doesn't Tax
-
4 Estate Planning Documents Every High-Net-Worth Family NeedsThe key to successful estate planning for HNW families isn't just drafting these four documents, but ensuring they're current and immediately accessible.
-
Love and Legacy: What Couples Rarely Talk About (But Should)Couples who talk openly about finances, including estate planning, are more likely to head into retirement joyfully. How can you get the conversation going?
-
How to Get the Fair Value for Your Shares in This SituationWhen a sale of substantially all corporate assets is approved by majority vote, shareholders on the losing side of the vote should understand their rights.
-
The 4 Estate Planning Documents Every High-Net-Worth Family Needs (Not Just a Will)
The key to successful estate planning for HNW families isn't just drafting these four documents, but ensuring they're current and immediately accessible.
-
Love and Legacy: What Couples Rarely Talk About (But Should)
Couples who talk openly about finances, including estate planning, are more likely to head into retirement joyfully. How can you get the conversation going?
-
How to Get the Fair Value for Your Shares When You Are in the Minority Vote on a Sale of Substantially All Corporate Assets
When a sale of substantially all corporate assets is approved by majority vote, shareholders on the losing side of the vote should understand their rights.
-
Dow Leads in Mixed Session on Amgen Earnings: Stock Market TodayThe rest of Wall Street struggled as Advanced Micro Devices earnings caused a chip-stock sell-off.
-
We're 62 With $1.4 Million. I Want to Sell Our Beach House to Retire Now, But My Wife Wants to Keep It and Work Until 70.I want to sell the $610K vacation home and retire now, but my wife envisions a beach retirement in 8 years. We asked financial advisers to weigh in.
-
How to Add a Pet Trust to Your Estate Plan: Don't Leave Your Best Friend to ChanceAdding a pet trust to your estate plan can ensure your pets are properly looked after when you're no longer able to care for them. This is how to go about it.
-
Want to Avoid Leaving Chaos in Your Wake? Don't Leave Behind an Outdated Estate PlanAn outdated or incomplete estate plan could cause confusion for those handling your affairs at a difficult time. This guide highlights what to update and when.
-
I'm a Financial Adviser: This Is Why I Became an Advocate for Fee-Only Financial AdviceCan financial advisers who earn commissions on product sales give clients the best advice? For one professional, changing track was the clear choice.
