Tax-Loss Harvesting Best Practices (And How To Scale It Across A Client Base)

Tax-Loss Harvesting Best Practices (And How To Scale It Across A Client Base)

Tax-loss harvesting – i.e., selling investments at a loss to capture a tax deduction while re-investing the proceeds to maintain market exposure – is a popular strategy for financial advisors to increase their clients’ after-tax investment returns. For many, however, tax-loss harvesting remains somewhat more of an art than a science: Because the value of harvesting losses is so dependent on an individual’s own tax situation, there is no single strategy that can be implemented across an entire, diverse client base. And to complicate things further, when it is decided to go ahead with tax-loss harvesting, there are numerous considerations involved to ensure the strategy is carried out correctly and avoids running afoul of the IRS’s wash sale rules (which could disallow losses and negate the value of the strategy altogether).

But because tax-loss harvesting can be so valuable in certain situations, having a framework for deciding which clients could be good candidates for tax-loss harvesting and a process for executing the strategy properly can be beneficial for advisors. And given the challenges of scaling the strategy across dozens or even hundreds of clients, a key consideration when developing these best practices should be how well they can be systematized and repeated whenever the advisor reviews client accounts for tax-loss harvesting opportunities – a factor which can be aided with technology, including software tools that many advisors already use regularly.

For example, advisors who use a Customer Relationship Management (CRM) tool may be able to use that tool to narrow down the list of clients to those who are good tax-loss-harvesting candidates, such as those in higher tax brackets (who are likelier to realize more value from deducting capital losses). From there, the advisor’s financial planning software may be able to model the client’s future tax rate when the investment is ultimately sold, allowing the advisor to estimate the long-term value of harvesting the loss today. Finally, many software tools for trading and rebalancing may incorporate tools for tax-loss harvesting, such as checking for potential wash sale violations and allowing the advisor to designate replacement securities. With these three tools (i.e., the advisor’s CRM, planning software that models future tax scenarios, and trading and rebalancing tools), advisors can build a systematic start-to-finish process for tax-loss harvesting – and because all three are already core parts of many advisors’ existing technology stack, doing so might require no additional investment in technology!

The key point, however, is that – like many tax planning strategies – tax-loss harvesting requires at least some individual attention to each client’s tax situation to ensure it is the right strategy for that client. Additionally, there are many considerations both in deciding when to harvest losses and in executing the strategy, which makes it all the more important to have a repeatable process to ensure that nothing gets missed.

At a minimum, advisors can consider using a standardized tax-loss-harvesting checklist to reduce the likelihood of overlooking any important information. And because there is often pressure to act fast when markets are down and when tax-loss harvesting opportunities present themselves, having a well thought-out framework for harvesting losses can help advisors focus more of their attention on the clients who will get the most value from it (and fully deliver on that value in the end!).

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