In 2025, market volatility has once again taken center stage. With several risks on the horizon, including uncertainty around global trade policy along with elevated equity valuations, investors might feel worried about the possibility of the first market downturn since 2022. While the prospect of a recession can be concerning, it’s important to remember that market dynamics are inherently unpredictable, and it remains uncertain whether stocks will end the year up or down.

For savvy investors, this volatility isn't just a challenge, it's an opportunity. Strategies such as tax-loss harvesting can be particularly advantageous during these periods of market fluctuation. Additionally, separately managed accounts (SMAs) provide investors with direct ownership of the underlying securities, enhancing the ability to take advantage of tax-loss harvesting opportunities.

By proactively implementing these strategies throughout the year, rather than waiting until year end, investors can potentially enhance after-tax portfolio returns and improve tax efficiency.

What is tax loss harvesting and how does it work?

Tax-loss harvesting is an investment strategy that can be used to reduce taxable income by selling securities at a loss. The primary goal is to offset capital gains from other investments, reducing the investor’s overall tax burden.

It’s important to know that tax-loss harvesting applies only to assets held in taxable accounts; in other accounts such as IRAs and 401(k)s, assets grow tax deferred¹ and aren’t subject to capital gains taxes in the year they occurred. But for taxable account holders, the tax savings can be substantial, particularly for those with high incomes that place them in the top tax brackets.

While tax-loss harvesting might seem complicated on the surface, it’s actually fairly simple; for example, assume a security that’s declined in value can be sold to generate a pretax loss of $10,000. That loss may in turn fully offset the net capital gain exposure from the sale of another holding whose value increased by $10,000.

In addition to offsetting investment gains, losses from tax-loss harvesting can also help reduce tax exposure from noninvestment income, such as wages. As of 2025, you can claim a capital loss deduction of up to $3,000 more than your capital gains, meaning you can reduce your taxable income dollar for dollar up to that limit. For taxpayers who are married and file separately, the limit is $1,500.

However, if you're considering selling securities as part of a tax-loss harvesting strategy, it's important to proceed carefully to ensure your losses remain deductible. The IRS imposes a rule known as the wash sale rule, which can complicate efforts to quickly repurchase a mutual fund or security after selling it at a loss.

To maintain the deduction, you must wait at least 30 days before reinvesting in the same investment or one that the IRS deems substantially identical. If you'd like to stay invested after realizing a loss, consider investing in a similar but not substantially identical investment. This way, you can maintain your market exposure while still benefiting from the tax advantages of tax-loss harvesting.

Don't wait until year end to think about your tax strategy

While year end is a popular time to identify tax-loss harvesting opportunities, there’s no need to wait. Given the elevated degree of uncertainty in the current market landscape, investors should consider taking advantage of this strategy throughout the year when possible. If markets rebound, you’ll have already locked in those losses; if markets continue to decline, more opportunities to harvest losses may arise. By staying proactive, you can capitalize on these fluctuations and enhance your portfolio’s tax efficiency. 

The importance of professional guidance

Given the complexities of tax-loss harvesting, consulting with a tax professional can be especially beneficial for investors with taxable accounts. It’s important to remember that there’s no guarantee this strategy will achieve a specific tax outcome or be in your best interest over the long term.

You can also explore prior viewpoints on our website that explain various tax strategies available to SMA investors. By combining professional guidance with solid information, you can work toward maximizing your tax efficiency while keeping your long-term investment goals in focus.

1 Tax deferral postpones the payment of taxes on asset growth until a later date—meaning 100% of the growth is compounded and won’t be taxed until withdrawn, usually at age 59½ or later, depending on the type of account or contract. Withdrawals from tax-deferred accounts are subject to ordinary income tax and, if made before age 59½, may be subject to a 10% penalty tax.