Tax-loss harvesting strategies—“harvesting” investment losses to help offset realized capital gains elsewhere in your portfolio—have become increasingly popular among investors. While loss harvesting strategies are evergreen ways to improve portfolio tax efficiency, they are especially beneficial in volatile markets when asset values fluctuate, presenting opportunities to capture those losses, use them to offset realized capital gains and potentially lower your tax bill.
But there’s a challenge: Over time, a couple of factors can cause a gradual decrease of the welcome tax benefits generated by loss harvesting strategies.
We’ve taken on the challenge. Read on for some solutions to make tax-loss harvesting continue doing more for you over the long term.
Tax-loss harvesting is designed to give you equity index exposure and potentially lower your tax bill. At its core, it involves selling an investment at a price below the purchase price to realize a loss for tax purposes. Once the security is sold, the loss may offset realized capital gains from other parts of your portfolio.1 To keep your account in line with index exposures, you can then purchase a similar investment. (When making this replacement purchase, be mindful to not violate the wash-sale rule.2)
The early years of a loss harvesting account can provide meaningful tax benefits. However, as the account matures, those benefits often begin to diminish: As losses are harvested and replacement securities are purchased at lower cost, the account’s overall cost basis can gradually decline, reducing future opportunities for capturing losses.
This phenomenon, sometimes referred to as “tax alpha decay” or ossification, is driven primarily by that cumulative lowering of portfolio’s cost basis, combined with equity markets’ long-term tendency to appreciate. We’ve found, however, that investors can counteract this decay by contributing additional cash to their accounts, resetting part of the account's cost basis and extending loss harvesting opportunities.
Our study explored three crucial questions: How much cash should be contributed, at what frequency, and what cadence?
We’ve analyzed three salient aspects of counteracting tax alpha decay:
Our studies simulated a series of equity index-tracking tax-loss harvesting accounts (also called vintages) funded initially with $1 million of cash. We simulated contributing additional cash to each one under a variety of scenarios. Our analysis spans vintages dating to January 1995. Each vintage tax-loss harvests over a 10-year horizon, while seeking to stay aligned with the S&P 500 Index’s sector and stock exposures, and forecast tracking error.
Finding: Based on our analysis, about 20% of an account’s value may need to be contributed in cash, annually, for a near-linear increase in potential tax savings.
Our analysis: Tax-loss harvesting account vintages that receive no additional cash contributions tend to generate about 1%–2% of potential tax savings per year3 over 10 years, depending on market conditions (for example, bear markets, or markets with high levels of dispersion among individual stock returns, may provide higher value opportunities for loss harvesting, relative to bull markets).
While our analysis assumed a simple, monthly approach for capturing losses,4 the study’s parameters are in line with academic research5 and general rules of thumb across the loss harvesting industry.
Clients may find this level of potential tax savings attractive. Yet it’s important to understand loss-harvesting benefits tend to be front-loaded. Potential tax savings typically exceed 1%, annualized in the portfolio’s early years (e.g, years 1–5), then taper off to below 0.5% in later years (e.g. years 8–10). On average, nearly 80% of a portfolio’s cumulative tax savings are realized within the account’s first five years.
We explored how much additional cash would fully counteract tax alpha decay, testing the impact of annual cash contributions ranging from 2.5% to 20% of the account’s value.
Based on this historical analysis, approximately 20% of an account’s value, contributed in cash on an annual basis, would theoretically keep the pace of potential tax savings rising in a near-linear fashion, as the graph illustrates.
Finding: Regardless of how much cash is added, the frequency of cash contributions doesn’t appear to matter to tax savings.
Our analysis: Next we analyzed the optimal frequency for contributions: monthly, quarterly, semi-annually or annually?
Again we tested various contribution amounts at each frequency over the vintage’s 10-year life. We found, as the chart shows, that regardless of how much cash is added, the contributions’ frequency doesn’t appear to affect the tax savings.
Two important considerations, however:
First, we excluded a monthly contribution scenario, which might trigger wash sale restrictions.6 A steady stream of monthly cash contributions (which would necessitate purchasing securities in the account) could reduce loss-harvesting opportunities.
Second, while our analysis found the potential tax savings were similar for contributions made on a quarterly, semi-annual and annual schedule, less frequent funding may confer a practical advantage. Fewer contributions means fewer trading constraints, which may offer the loss harvesting strategy greater flexibility to capture losses when opportunities arise.
Finding: Investing the full amount at the start can result in more harvested losses in about 55% of cases, but this is sensitive to market conditions.
Our analysis:
So far, we've primarily focused on strategies for gradually adding cash to a loss harvesting account, to maintain the ability to capture losses. Another question investors may be asking is whether to fund their loss-harvesting account all at once (lump sum funding) or to spread this account funding out over time (phasing -in).
We found that investing the full amount at the start can result in more harvested losses in about 55% of cases, but this is sensitive to market conditions. Market downturns early in an account’s lifecycle favor up-front investment—the investor benefits from having the maximum account value from which to tax-loss harvest.
But a gradual funding approach works better in upward-trending markets. The reason: Gradual funding spreads out the additions for fresh tax lots, making it easier to find loss-harvesting opportunities in an account’s later years.
These findings may be counterintuitive, if you think only in terms of the cadence of contributions that might be optimal for investment performance. (Few investors, if they had known, would have willingly invested a large sum immediately before the dot-com crash or the global financial crisis—even though those periods’ steep, prolonged drawdowns were fruitful for capturing losses.) We explore the investment performance benefits and trade-offs of phasing into the markets in this article.
Ultimately, cash can be king in preventing tax alpha decay. Across a wide range of market cycles and portfolio vintages, our study’s most consistent takeaway is straightforward: The more cash added to an account over time, the greater the potential for tax-loss harvesting.
Importantly, we found no clear advantage to any specific contribution frequency—as long as additions are spaced out enough to preserve flexibility for harvesting. As always, the right approach depends on an investor’s broader objectives, preferences and portfolio context.
Your J.P. Morgan team is here to help evaluate the trade-offs and design a strategy that supports long-term tax efficiency while staying grounded in your unique goals.
1If your harvested losses exceed your realized capital gains for the year, you can apply up to $3,000 of the losses to offset ordinary income ($1,500 if you're married filing separately). And remaining losses can be carried forward indefinitely, to help offset gains or up to $3,000 of income in future years.
2Generally speaking, this rule prevents you from claiming a current tax loss if you buy a security considered “substantially identical” within a 30-day period before or after the loss trade date. Internal Revenue Code, Section 1091. Instead if the wash sale loss disallowance rule is invoked, you must adjust basis in the replacement security for the disallowed loss which is effectively deferred until the replacement security is sold.
3Tax savings quoted or shown in this analysis is gross of any management or product fees that may be associated with tax-loss harvesting strategies.
4In How cutting edge technology can enhance your wealth with tax savings (June 2025), we highlighted how a daily tax loss harvesting process can significantly uplift tax savings; however, we simulate monthly tax loss harvesting in this piece to simplify the analysis.
5Shomesh E. Chaudhuri, Terence C. Burnham and Andrew W. Lo, “An Empirical Evaluation of Tax-Loss-Harvesting Alpha, Financials Analysis Journal Volume 76, Issue 3, June 30, 2020.
6The wash sale rule applies to purchases of substantially identical securities within 30 days before or after a loss is harvested.
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