The benefits of tax-loss harvesting

Tax-loss harvesting (TLH) is a portfolio management technique that uses realised investment losses to offset taxable gains, with the goal of improving after-tax outcomes over time.
Research published by Vanguard (July 2024) suggests that, under certain assumptions, TLH can lead to meaningfully higher after-tax performance over a ten-year period compared with holding a similar exposure via an ETF or mutual fund without loss harvesting.
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Line chart comparing cumulative after-tax returns with and without tax-loss harvesting over a ten-year period, showing higher returns with tax-loss harvesting.
29%
Potential after-tax performance over ten years

What research says about tax-loss harvesting benefits

TLH can produce higher cumulative after-tax performance than a comparable equity ETF or mutual fund.
The benefit tends to be strongest in earlier years and gradually declines as portfolios appreciate and fewer losses become available — a phenomenon known as ossification.
When expressed on a cumulative basis, the study observed a potential after-tax performance uplift of roughly 29% over ten years, under the study’s assumptions.

Why tax-loss harvesting can improve after-tax efficiency?

The potential effectiveness of tax-loss harvesting is influenced by several factors:
01
Tax Rates and Investor Profile
Higher marginal tax rates generally increase the relative value of harvested losses.
02
Market Volatility and Asset Structure
Price fluctuations create more frequent opportunities to realise losses, particularly when portfolios hold individual securities rather than a small number of broad-market ETFs.
03
Reinvestment and Loss Availability
Reinvesting proceeds associated with harvested losses can help replenish future loss opportunities and reduce the long-term effects of ossification.
04
Evaluation Frequency
More frequent analysis captures loss opportunities that periodic or annual reviews may miss.
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Limitations and important considerations

Tax-loss harvesting does not eliminate taxes and should be understood primarily as a tax deferral mechanism. Harvested losses may increase future unrealised gains, which could become taxable when positions are eventually sold.
Actual outcomes depend on a wide range of factors, including market conditions, portfolio composition, tax regimes, and individual investor circumstances.
This content is provided for educational purposes only and does not constitute investment, tax, or legal advice. Results referenced are hypothetical, based on historical data and stated assumptions, and do not guarantee future outcomes.
Research Source:
Paradise, T., Khang, K., & Dickson, J. (2024). Tax-loss harvesting: why a personalized approach is important. Vanguard Research.
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Insights

An educational overview of tax-loss harvesting, informed by research and practical considerations.
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Lumvest provides analytical software tools for informational and educational purposes only. The platform performs deterministic, rules-based analysis of user-supplied trade data and presents mechanically identifiable signals related to tax-loss harvesting. Lumvest does not provide investment advice, tax advice, legal advice, accounting advice, or financial planning services. Nothing on this website or generated by the platform should be construed as a recommendation, solicitation, endorsement, or opinion regarding the purchase, sale, holding, or replacement of any security or financial instrument. The platform does not execute trades, manage portfolios, determine suitability, assess investor objectives, or apply jurisdiction-specific tax laws or rates. All outputs are intended for professional review and independent evaluation. Any decisions made based on the information provided are the sole responsibility of the user. Exposure similarity analysis is based on historical correlation and related statistical measures. Assets identified as highly correlated are not identical and may differ materially in index construction, risk characteristics, liquidity, expenses, and tax treatment. Any exposure alternatives presented are provided for informational purposes only and do not constitute recommendations.Results depend entirely on the completeness and accuracy of the data provided, current market prices at the time of analysis, and configured analytical parameters. The platform does not predict future market performance, tax outcomes, or investment results. Past performance and historical analysis are not indicative of future results.Tax-loss harvesting may not be suitable for all investors and its effectiveness varies based on market conditions, portfolio composition, tax regimes, and individual circumstances. Tax laws and regulations are subject to change and may differ by jurisdiction.Users should consult their own qualified investment, tax, legal, and financial professionals before making any financial decisions. Use of this platform constitutes acceptance of these limitations.
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