If you've experienced a major liquidity event—a business sale, the exercise of stock options, or the sale of a highly appreciated investment—you've probably asked yourself a familiar question: Is there anything I can do to reduce the taxes I'll owe?
Advanced tax-loss harvesting strategies have become increasingly popular because they can help offset significant capital gains. The challenge is that they're often implemented to solve a short-term tax problem, when they're really designed to be long-term investments. That disconnect is one of the biggest misconceptions we see.
Many investors focus almost entirely on the tax savings they'll generate this year. While that's certainly an important part of the conversation, it's only part of the story. Before implementing any strategy, it's important to understand how it works, why it's structured the way it is, and whether it fits into your long-term financial goals.
Traditional tax-loss harvesting is a valuable planning tool. When investments decline in value, those losses can be realized and used to offset gains elsewhere in a portfolio.
The challenge is that successful portfolios don't stay underwater forever. As investments appreciate over time, there are naturally fewer positions trading below their cost basis, which means fewer opportunities to harvest losses. That's one of the reasons more advanced tax-loss harvesting strategies have gained traction—they're designed to continue creating tax-loss opportunities long after a traditional approach has become less effective.
Most tax-loss harvesting solutions are built around the strategy itself, requiring investors to adapt their portfolios to fit the model. We thought the strategy should adapt to the investor instead.
That's especially important for clients with concentrated stock positions. Conventional wisdom says to diversify immediately, and sometimes that's the right decision. But if someone has spent decades building wealth in a company they still believe in (which is the case for many employee-owners in the tech space), we don't think they should have to sell just to mitigate their tax burden. So we ask: How can we offset taxable gains while preserving the assets they want to keep?
That philosophy ultimately shaped our tax-loss harvesting strategy.
What's unique about our approach is that there are two portfolios working together. The first is the client's existing portfolio, which can often remain intact rather than being sold to implement the strategy. Alongside it is a second portfolio (technically called the portfolio extension) that we sometimes refer to as the bonus portfolio.
The goal of the bonus portfolio is to generate losses repeatedly over time, and it’s designed so it isn't dependent on the overall market declining. Instead, differences in how individual companies perform create opportunities to realize tax losses. The mechanics are sophisticated, but the objective is simple: create a repeatable source of tax losses while giving investors more flexibility than traditional approaches typically allow.
This isn’t a novel concept, but too many managers try to accomplish two different objectives with the bonus portfolio. They want it to generate tax losses, but they also want it to produce investment returns. On paper, that sounds like a great combination. In practice, pursuing additional returns typically means taking on additional risk and volatility—unnecessarily.
The client's primary portfolio is already responsible for growing wealth over time. So our perspective is that the bonus portfolio should have a much narrower objective: generate tax losses as efficiently and consistently as possible. By keeping those roles separate, the strategy becomes simpler, more predictable, and better aligned with why investors are using it in the first place.
Advanced tax-loss harvesting can be an incredibly effective planning tool for the right investor, but it isn't something to evaluate based solely on this year's tax bill. It's a long-term investment that should complement the rest of your financial plan, not exist outside of it.
For us, the conversation is never just about reducing taxes. It's about helping clients make thoughtful decisions that align with their broader goals, preserve flexibility, and create better outcomes over time.
The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. This material is provided for informational and educational purposes only and should not be construed as investment, legal, or tax advice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security or investment strategy. Tax-loss harvesting and advanced tax-management strategies are not appropriate for all investors and may not result in tax benefits. The value of any tax benefit depends on an individual's unique circumstances and may be affected by future changes in tax laws. All investing involves risk, including the potential loss of principal. Past performance is not indicative of future results. Please consult with a qualified financial, legal, or tax professional before making any financial decisions or implementing any investment or tax strategy. Steward Partners, its affiliates, and its Wealth Managers do not provide tax advice.
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