Tax-Loss Harvesting for UHNW Investors

Tax-loss harvesting is a fundamental component of tax-aware investing. For ultra-high-net-worth (UHNW) investors, this strategy can consistently generate tax efficiency across varying market conditions, potentially aiding capital preservation and enhancing long-term wealth accumulation.

At IEQ Capital, we encourage clients to look beyond traditional long-only strategies. By integrating advanced approaches such as long/short tax-loss harvesting, we can identify opportunities to defer capital gains and improve after-tax performance, irrespective of market cycles.

"As the CIO of IEQ Capital, many of our clients face the dual challenge of generating significant capital gains combined with substantial ordinary income, making proactive tax management essential. By employing adaptive, long/short tax-loss harvesting strategies, we're able to identify and unlock meaningful tax efficiencies tailored specifically to our clients’ complex financial profiles." - Alan Zafran, Co-Founder and Managing Partner at IEQ Capital

Understanding Tax-Loss Harvesting

Tax-loss harvesting involves strategically selling investments that have decreased in value to realize capital losses. These losses offset realized capital gains, reducing an investor’s overall tax liability. If losses surpass gains, investors can deduct up to $3,000 per year against ordinary income, carrying forward any remaining losses to future tax years per IRS regulations.¹

The effectiveness of tax-loss harvesting can be amplified through disciplined reinvestment. Proceeds should ideally be allocated to similar, but not identical, securities, preserving market exposure while capturing tax benefits.

Challenges of Traditional Long-Only Tax-Loss Harvesting

Traditional long-only strategies typically target tracking a broad equity index. While initially effective, these approaches become increasingly limited as markets trend upward. Over time, fewer holdings trade below cost, which can significantly reduce opportunities to realize losses.²

Adaptive Solution: Long/Short Tax-Loss Harvesting

Long/short tax-loss harvesting can help overcome these limitations by incorporating short positions, which can enable investors to generate losses irrespective of market direction. This adaptive structure can create tax savings, particularly during upward or stagnant markets where traditional methods may falter.

Long/Short Harvesting Strategies Typically:

• Maintain long positions to align with broad market exposure.
• Use short positions to intentionally generate losses during market upswings, which can create valuable tax offsets.
• Can capture losses effectively from both sides of the portfolio without sacrificing performance alignment.

Such an approach may significantly extend the duration of effective tax-loss harvesting from a few years to decades, which could prove especially valuable for clients managing substantial taxable portfolios, concentrated holdings from business sales, real estate, or inherited stock positions.

The Advantage of Year-Round Harvesting

While tax-loss harvesting is often viewed as a year-end strategy, substantial tax opportunities can arise throughout the year due to market volatility, earnings announcements, and temporary disruptions.

Year-round Harvesting Can Provide Value to Investors Who:

• Possess substantial unrealized gains from concentrated stock positions.
• Are transitioning portfolios after business or real estate sales.
• Manage multi-generational wealth and seek to accumulate realized losses for long-term tax planning.

At IEQ Capital, our continuous harvesting approach includes real-time portfolio monitoring, strict adherence to IRS wash-sale regulations, and disciplined reinvestment practices, which can ensure alignment with long-term investment goals.

"Our firm's deep expertise in alternative investing positions us to curate innovative, tax-aware investment strategies. This disciplined approach not only differentiates IEQ Capital but can also significantly enhance our clients' long-term after-tax performance." Colin Mark-Griffin, Managing Director of Research at IEQ Capital.

Key Considerations Before Implementing

Although tax-loss harvesting can be highly beneficial, it should complement broader wealth management objectives. Investors must consider:

• Investment objectives: Tax considerations should enhance, not dictate, portfolio construction.
• Short-term vs. long-term gains: Offset short-term gains first, as they are taxed at higher ordinary income rates.
• Compliance: Adhere to IRS wash-sale rules, prohibiting repurchase of substantially identical securities within 30 days of a sale realizing a loss.
• Coordination: Integrate tax-loss harvesting strategies with comprehensive tax and estate planning for maximum efficacy.

Preserving Wealth Through Tax Efficiency

Tax-loss harvesting is more than a tactical maneuver. For UHNW investors, it represents a strategic, long-term approach that supports capital preservation, risk management, and sustained after-tax growth. While traditional methods can yield short-term benefits, adaptive long/short harvesting can provide ongoing tax efficiencies aligned with enduring financial goals.

At IEQ Capital, we specialize in designing customized, tax-efficient investment strategies that can meet immediate needs while strategically positioning portfolios for future generations. If you're seeking enhanced tax efficiency and tailored financial solutions, we invite you to speak with our team.

1. Internal Revenue Service. “Tax Topic No. 409: Capital Gains and Losses.” Updated January 2024. https://www.irs.gov/taxtopics/tc409
2. Hunt, Dan. “Tax-Loss Harvesting Can Work Year-Round for Investors—Here’s How.” Morgan Stanley, January 15, 2025. https://www.morganstanley.com/articles/tax-loss-harvesting

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