Tax Loss Harvesting

What is tax-loss harvesting?

Selling securities at a loss to offset capital gains and reduce taxes.
This strategy can lower your overall tax liability without sacrificing long-term portfolio growth. Tax-loss harvesting is a disciplined approach that helps tax-aware investors enhance after-tax returns.

Use Cases

Real estate - offset the capital gain and straight-line depreciation recapture of sale.

Business sale – offset the capital gain from the sale of a
privately held business. Most effective when paired with an installment sale.

Concentrated stock – tax-neutrally diversify low basis position to reduce risk. Most effective when paired with a collar + short box
spread.

Private equity – whether you work in PE and have capital
gains + carried interest or invest in PE as part of your investment portfolio,
harvesting capital losses can reduce your taxes.

Retirement – ability to withdraw from your portfolio
tax-nuetrally by offsetting capital gain realizations with tax-loss harvesting.

Direct Indexing vs Tax-Aware Long-Short

Direct Indexing
Typical Experience¹
✅ Broad market exposure, low tracking error
❌ Expected to underperform benchmark net of fees
❌ Tax benefits mostly in down equity markets
❌ Tax benefits that decline to zero after a few years
Tax-Aware Long-Short
✅ Broad market exposure, low tracking error
✅ Potential for pre-tax outperformance, net
of fees
✅ Potential tax benefit in all market environments
✅ Tax benefits may continue in perpetuity

1. Source: Liberman, Joseph and Krasner, Stanley and Sosner, Nathan and Maia de Freitas, Pedro Paulo, Beyond Direct Indexing: Dynamic Direct Long-Short Investing (May 3, 2023). Available at SSRN: https://ssrn.com/abstract=4437402 or http://dx.doi.org/10.2139/ssrn.4437402

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