Why year-round tax management can help investors capture opportunities that may disappear before year-end.
By Yanay Lehavi, co-founder of CapitalGain.ai (CGai)
Tax-loss harvesting is often treated as a year-end exercise. As December approaches, investors review their portfolios, identify losing positions, and consider selling them to offset capital gains realized during the year.
The strategy is straightforward: realized investment losses can offset realized capital gains, potentially reducing the investor’s tax liability.
The problem is timing.
Investment losses do not necessarily remain available until December. A stock may decline sharply in March, recover during the summer, and finish the year at a gain. Another may experience a substantial selloff in August or September before rebounding in the final quarter.
An investor who waits until year-end to review tax-loss harvesting opportunities may discover that the losses that could have reduced their tax bill have already disappeared.
Tax-loss harvesting is therefore better approached as a year-round investment discipline than as a December tax-planning exercise.
A $3,500 opportunity that disappeared
Consider a hypothetical investor who, in June 2026, purchased shares of two companies.
The first was SpaceX. Attracted by the excitement surrounding its public debut, the investor purchased shares at approximately $200.
The second was Microsoft. Following a period of weakness in its share price, the investor saw an opportunity to establish a position at approximately $390.
By October, Microsoft had risen to $480. The investor decided to realize a $10,000 profit.
Assuming a combined federal and state marginal tax rate of 35% on the short-term capital gain, the sale would generate a $3,500 tax liability, leaving $6,500 in after-tax profit.
However, an opportunity to reduce that tax liability had appeared several months earlier.
During August, SpaceX had declined from the investor’s $200 purchase price to approximately $110, creating an unrealized loss of roughly $10,000.
Had the investor realized that loss while it was available, it could potentially have offset the $10,000 Microsoft gain realized later in the year.
Under the simplified tax assumptions in this example, the loss would have eliminated the $3,500 tax attributable to the Microsoft gain.
The investor could also have considered a suitable alternative investment to maintain some market exposure during the wash-sale waiting period, with the intention of reestablishing the SpaceX position afterward.
Instead, the investor continued holding the shares. By December, SpaceX had recovered, eliminating the unrealized loss.
The Microsoft investment had performed exactly as expected. What changed was the amount of the profit the investor could retain after taxes.
The investor and transactions in this example are hypothetical. The prices are illustrative, and the tax calculation assumes the loss is fully deductible against the gain at the stated rate.
Why December may be too late
Year-end tax planning remains important, but relying on it exclusively creates two problems.
First, the availability of losses depends on market conditions. An investment that presents a substantial harvesting opportunity in August may no longer offer one in December.
Second, waiting until the final weeks of the year leaves less time to evaluate the consequences of selling, identify appropriate replacement investments, and navigate wash-sale restrictions.
Tax-loss harvesting does not require investors to sell every position that declines in value. Investment objectives, transaction costs, portfolio exposure, and the potential tax benefit must all be considered.
The objective is to identify and evaluate opportunities as they arise, rather than discovering them only after they have disappeared.
The complexity behind tax-loss harvesting
Identifying an investment that has declined in price is only the beginning.
Consider an investor who purchases 100 shares at $50 and another 100 shares at $100. The stock subsequently trades at $80.
The combined position has a $1,000 unrealized gain. However, the second purchase represents a separate tax lot with a $2,000 unrealized loss.
An investor reviewing only the position’s overall performance could overlook that loss entirely.
Tax-lot analysis can reveal harvesting opportunities within otherwise profitable holdings. It can also identify shares whose cost basis has been increased by previously deferred wash-sale losses, potentially changing the tax consequences of selling those particular shares.
The investor must then determine whether selling the relevant tax lots would produce a deductible loss.
The two wash-sale traps
The wash-sale rule is commonly understood as a restriction on repurchasing a security within 30 days after selling it at a loss.
However, the rule also applies to qualifying purchases made during the 30 days preceding the loss sale.
For example, an investor who sells shares at a loss on September 15 and repurchases substantially identical shares on September 25 may trigger a wash sale.
Alternatively, purchasing additional shares on September 5 and selling older shares at a loss on September 15 may produce the same result.
The relevant period therefore extends across 61 calendar days, including the sale date.
In a typical wash sale involving replacement shares in a taxable account, the disallowed loss is added to the tax basis of those shares. The loss is generally deferred rather than permanently eliminated.
Nevertheless, deferral may defeat the investor’s immediate objective of offsetting gains in the current tax year.
The challenge becomes greater when transactions occur across multiple brokerage accounts.
A broker may identify certain wash sales within an individual account, but its reporting may not capture relevant transactions elsewhere. An automatic purchase in another account could affect the tax treatment of a loss sale without appearing in the original broker’s wash-sale calculations.
Consequently, investors may discover reporting complications only when preparing their tax returns, after the relevant trading decisions have already been made.
Maintaining investment exposure
An investor who harvests a loss may nevertheless wish to maintain exposure to the security or sector involved.
Selling an investment and remaining in cash throughout the waiting period creates the risk of missing a market recovery.
One alternative is to consider a different investment offering similar economic exposure without being substantially identical to the security sold.
For an individual technology stock, this might involve evaluating a diversified technology-sector fund or another investment with relevant market characteristics.
Such alternatives will not replicate the original stock’s performance, and their suitability depends on the investor’s objectives. The distinction between similar and substantially identical securities also requires careful consideration.
The investor must then monitor the applicable dates and any additional transactions that could affect the intended tax treatment.
When repeated across numerous securities and brokerage accounts, these tasks can become a significant administrative burden.
The role of technology in year-round tax management
Investment technology has made portfolio monitoring increasingly accessible. Investors can review prices, performance, transactions, and market developments continuously.
Tax management, however, often remains concentrated around annual reporting and year-end reviews.
A more integrated approach would incorporate tax considerations into investment decisions throughout the year.
Such a system could consolidate information from existing brokerage accounts, examine individual tax lots, identify potential harvesting opportunities, and estimate their tax implications.
It could also monitor relevant transactions for potential wash-sale conflicts, help evaluate alternative investments, track waiting periods, and notify investors when a previously sold security may be considered for repurchase.
Importantly, these capabilities need not require investors to transfer their assets or delegate trading authority. Technology can provide analysis and timely information while leaving investment decisions with the account holder.
The value lies not simply in automating calculations, but in making relevant information available before an opportunity disappears.
A year-round approach to after-tax returns
Tax-loss harvesting cannot eliminate investment risk or guarantee a particular tax outcome. Nor should tax considerations override sound portfolio management.
However, the timing of investment decisions can materially affect the tax consequences of otherwise similar returns.
The hypothetical investor’s experience illustrates the difference between reviewing taxes after the fact and considering them while investment opportunities remain available.
By December, the loss that could have offset the Microsoft gain no longer existed. By the following April, the opportunity was even further out of reach.
For investors seeking to improve after-tax outcomes, tax-loss harvesting is therefore better understood as an ongoing portfolio-management discipline than as a year-end administrative task.
Investment performance matters. So does how much of that performance the investor ultimately retains.
About the author:
Yanay Lehavi is co-founder of CapitalGain.ai (CGai), a California-based wealthtech company developing technology to help investors manage the tax impact of their existing brokerage portfolios. He previously served as an Executive Vice President at PIMCO.
