Strategies for tax-efficient investing

Feb 26, 2026 7:45:00 AM | Tax efficiencies Strategies for tax-efficient investing

Discover how advisors use tax-loss harvesting and rebalancing strategies to maximize tax efficiency to deliver significant value for their clients.

One of the biggest ways advisors create value is by helping clients manage taxes. Tax‑loss harvesting is a powerful tool here, especially for clients looking to offset realized gains and reduce their tax bills. When done thoughtfully, these strategies can generate meaningful tax alpha.

Researchers at MIT and Chapman University calculated that tax-loss harvesting yielded almost an additional 1% annual return each year from 1928 to 2018. Recent research by Columbia Business School professor and chief investment officer Harry Mamaysky, suggests the “alpha” from tax-loss harvesting is between .30% and .65%, depending on the design of the models used in any estimates, with most of the benefits accruing in the first few years of the strategy.

Here are a few ways rebalancing and tax‑loss harvesting help advisors deliver more value.

Market volatility creates opportunity

Volatile markets make tax‑loss harvesting even more compelling. That’s why the past few years, with swings driven by inflation, rates, and uncertainty — have created so many opportunities.
 
Even when portfolios are up overall, it’s essential to understand what’s driving performance. Knowing where gains and losses come from helps advisors manage tax obligations without sacrificing exposure to market upside. Clients expect this level of insight and look to advisors for tax‑smart leadership in choppy markets.

The crucial role of capital gains budgets

Avoiding short‑term capital gains is a classic way to save your clients money. But advisors can go further by optimizing location, placing assets in the right types of accounts to minimize taxes long‑term.
 
Setting capital gains budgets helps control annual tax burdens. These budgets can be applied at:
  • short‑term
  • long‑term
  • or combined capital gains
You can set limits by dollar value or as a percentage of the portfolio.
Clients can also extend the benefits of tax‑loss harvesting by:
  • adding new cash to accounts
  • donating appreciated securities to a donor‑advised fund (DAF)
  • rebalancing regularly to create fresh tax lots
And with the SECURE 2.0 Act  of 2022 now in play, thoughtful rebalancing is even more important. Quarterly rebalancing helps advisors harvest losses, avoid large capital gains distributions, and optimize asset location in retirement accounts.

Tax-loss harvesting at the household-level

More advisors are embracing householding because clients want more control over taxes and location preferences. Reviewing risk and alignment across all accounts in a household delivers a clearer picture and better outcomes.
 
Rebalancing at the household level helps:
  • define location preferences across taxable, tax‑deferred, and tax‑exempt accounts
  • reduce or eliminate tax consequences when possible
  • apply wash-sale logic across the household
  • protect alignment with capital gains budgets
This holistic view creates consistency, efficiency, and smarter tax management.

Direct indexing becomes more accessible

Direct indexing used to be limited to the wealthiest investors. Not anymore.
Direct indexing offers:
  • more customization than ETFs or mutual funds
  • the ability to harvest losses for individual securities
  • tax-efficiency even in years when the overall index gains
As investors own the underlying securities directly, they can capture losses that would otherwise be washed out inside a fund. That’s why many affluent, and now mass-affluent, investors see direct indexing as a core part of tax‑smart planning.

Technology’s integral role in tax-loss harvesting

Great tax‑efficient investing requires great technology. Modern rebalancing platforms make tax‑loss harvesting systematic, continuous, and easier to manage.

It should also provide capabilities for:

  • Alerting advisors when a trade is at risk of breaching a pre-specified budget
  • Realizing gains or losses at the position or classification level and holistically across investment portfolios
  • Considering short-term and long-term gains, capital loss carryovers, and gains generated from the orders themselves
  • Factoring in restrictions, minimum trade size, and loss or gain thresholds to influence trade recommendations
  • Offering different methods of harvesting gains and losses, including closing the position, selling lots based on cost basis method, and selling specific lots
Technology keeps everything coordinated, consistent, and aligned with each client’s goals.

The key is tax-sensitive rebalancing

Tax‑loss harvesting isn’t a once‑a‑year event. It’s a year‑round discipline.
Applying tax‑aware rebalancing throughout the year helps advisors:
  • stay aligned with investment policies
  • harvest meaningful losses as they emerge
  • avoid unnecessary capital gains distributions
  • optimize asset location in retirement accounts
Some advisors take a continuous approach, reviewing portfolios daily to find new opportunities. It’s a proactive strategy that compounds value and helps clients stay ahead of year‑end surprises.
 
Ongoing, tax‑sensitive rebalancing keeps portfolios aligned, tax‑efficient, and working toward long‑term goals. And it makes a real difference in clients’ financial outcomes.
 
 

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