For investors with portfolios exceeding the $1 million mark, tax-loss harvesting (TLH) is no longer a year-end gimmick—it’s a sophisticated, ongoing strategy essential for generating Tax Alpha. While the basic concept (selling losers to offset winners) is simple, high-net-worth investors must employ advanced tactics to maximize their after-tax returns and comply with stringent IRS rules.
Here is a look at the top strategies utilized by high-net-worth advisors to manage and grow seven-figure portfolios.
1. Direct Indexing: The Granular Approach
The $1M+ portfolio is perfectly suited for Direct Indexing.
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The Problem with ETFs: When you own an ETF (like one tracking the S&P 500), you can only harvest a loss when the entire fund is down.
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The Direct Indexing Solution: You hold the individual stocks that make up the index. This allows a manager to continuously monitor the portfolio and sell individual stocks that have dropped below cost basis, even if the overall market is up.
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The Advantage: You maintain market exposure while generating losses all year long, creating a large pool of capital losses that can offset current or future capital gains elsewhere in your financial life (e.g., concentrated stock sales, real estate sales).
2. Systematic, Year-Round Harvesting
Basic TLH is done in December. Advanced TLH is done daily or monthly, driven by clear, automated rules.
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Set Clear Thresholds: Instead of waiting for market dips, a high-net-worth strategy sets automated triggers (e.g., “Harvest any position that is down 10% from cost basis” or “Sell any position that generates a usable loss over $2,500”).
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Avoid Wash Sales with Precision Swaps: To maintain market exposure without running afoul of the Wash Sale Rule (no buying a “substantially identical” security 30 days before or after the loss sale), sophisticated platforms employ Tax Swaps.
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Example: Sell an S&P 500 ETF (like VOO) at a loss and immediately buy a Total Stock Market ETF (like VTI). These are considered different funds, allowing you to realize the loss while staying invested in the broad US equity market. The original position can be repurchased 31 days later.
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3. Tax-Aware Asset Location
This strategy focuses on where you hold your assets to minimize overall tax drag, greatly amplifying the benefits of TLH.
| Account Type | Recommended Asset Class | Rationale |
| Taxable Brokerage | Tax-Efficient Assets (Index ETFs, Municipal Bonds, Loss-Harvesting Candidates) | You want your losses to be usable here. These assets generate fewer taxable events annually. |
| Tax-Deferred (401k/IRA) | Tax-Inefficient Assets (High-Turnover Funds, REITs, High-Dividend Stocks) | These investments generate significant taxable income, but the growth is sheltered until withdrawal. TLH does not apply here. |
4. Advanced: Tax-Aware Long-Short Strategies
For the truly sophisticated investor with large, predictable capital gains (e.g., from private equity exits, stock options, or business sales), this strategy seeks to actively generate capital losses while maintaining a neutral market position.
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How it Works (The 130/30 Strategy): The manager buys 130% of the portfolio value in long positions (stocks expected to outperform) and shorts 30% of the portfolio value in positions expected to underperform, maintaining a net 100% market exposure.
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The Benefit: The constant activity of buying and short-selling creates numerous new tax lots that frequently dip into negative territory, generating a huge pool of harvestable losses year-round, even in rising markets. These losses can then be used to dramatically offset large, lump-sum gains elsewhere.
5. Strategic Gain/Loss Coordination
For a portfolio over $1M, losses are not just about offsetting immediate gains. They are a Tax Asset that must be managed.
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Offsetting Ordinary Income: If your realized capital losses exceed your realized capital gains in a given year, you can use up to $3,000 of the excess loss to offset your highly taxed ordinary income (salary, interest, etc.).
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Loss Carry-Forward: Any remaining excess losses are carried forward indefinitely to offset future capital gains. This means a large loss harvested today can reduce your tax bill for the next decade.
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Lot Selection: When selling a winner for an income need, use Specific Identification to sell the highest cost basis lots first. Conversely, sell the lowest cost basis lots when liquidating a position you plan to donate to charity (see below).
⚠️ Important Note on Charitable Giving
For high-net-worth individuals, always consider donating highly appreciated securities (those with large unrealized gains) to a Donor Advised Fund (DAF) or directly to charity, rather than selling them first. You get a tax deduction for the fair market value and you avoid paying capital gains tax on the appreciation entirely.
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