Investment Strategy
Apr 4, 2025
How to enhance tax savings during market volatility
In today’s market environment, the need for active tax management can be greater than ever. With elevated volatility and more modest forward-looking return expectations – clients are increasingly seeking personalized tax-managed strategies that can deliver higher after-tax returns. While tax-loss harvesting strategies are evergreen, now can be an especially opportune time for U.S. investors to think about incorporating tax-loss harvesting into their portfolios’ ongoing management – here’s why:
U.S. equity markets have experienced robust gains over the past two years, as volatility remained tempered. While our Long-Term Capital Markets assumptions still suggest long-term upside in U.S. equities1, it would not be surprising to see volatility pick up after being muted for an extended period of time. We wouldn’t rule out the possibility of market pullbacks – looking back over the past 40 years, the S&P 500 average intra-year drawdown was -14%. (Even with those pullbacks though, the index finished higher in 31 of those 40 years.) Looking ahead, uncertainty around trade policy and its impact on inflation and growth expectations, on top of unstable geopolitics, could create a bumpy ride for the markets.
Moreover, after a decade of strong market returns, we expect more modest performance for equities looking ahead. Through the end of 2024, the S&P 500 Index returned 13.1% annualized on a 10-year basis, while our forward-looking forecast estimates for U.S. Large Cap Equities are closer to a 6.7% return over the next 10-15 years.1 This makes it more important than ever for clients to squeeze the most they can out of their returns.
Ongoing tax-loss harvesting can help transform market volatility into tax benefits for you
One silver lining of uncertain markets is that higher volatility means you may have more opportunities to capture (i.e. “harvest”) losses and generate tax deductions.
How tax loss harvesting works, at its simplest, is this: In order to realize a loss for tax purposes, you have to sell the investment for a price lower than what you originally paid. Then, if you like the investment and/or want to preserve your portfolio’s asset allocation so you might capture potential long-term investment upside, you can purchase a similar investment. However, when making this replacement purchase, be mindful to not violate the wash-sale rule2.
For example, say that in January 2020, you purchased $100K worth of Stock A. After news of the pandemic hit, its value plummeted to $60K.
If you quickly sold Stock A at its new valuation of $60K, you could have realized a short-term tax loss of $40K. That $40K in losses could offset $40K worth of short-term gains made in other parts of your portfolio in 2020 or any subsequent year3, which would be worth up to $16,320 of potential federal income tax savings.
Because you want to keep your portfolio aligned to your objectives, you choose to reinvest the $60K of proceeds from selling Stock A by purchasing Stock B, which has similar characteristics (but is not substantially identical so you don’t violate the wash-sale rule).
With your ownership of Stock B, you’d be able to benefit from this market sector’s recovery from the pandemic a year later. So, hypothetically, you entered February 2021 with Stock B worth $100K after the recovery, but you also saved up to $16,320 on your 2020 federal income tax bill, which means more money that you could use to invest.
Stock A may have similarly rebounded to a $100K value by February 2021–but if you simply held on to Stock A all along, you wouldn’t have generated the tax benefit.
How to turn a stock market loss into a positive—by tax-loss harvesting4
Now, imagine this tax-loss harvesting strategy applied to a substantial portion of your portfolio.
If $10mm of your overall portfolio is invested into a tax-loss harvesting strategy, 1% of tax benefit would mean $100K in potential annual savings on that year’s income tax bill. If 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.
Loss harvesting may open up opportunities in turbulent markets
Instead of just riding out the bumps in markets, you can use the market’s natural volatility to your advantage, by crystallizing losses along the way. To drill into the relationship between loss harvesting and market volatility, J.P. Morgan Asset Management analyzed average losses captured for the month alongside realized volatility in the S&P 500 Index during the month5 for hypothetical portfolios incepted in each year beginning in 1993 and held through 2024. The portfolios sought to deliver returns similar to the S&P 500 Index, while harvesting losses on a monthly basis in order to enhance tax savings.6
The analysis highlighted a clear pattern – higher realized volatility during the month leads to an increase in net losses harvested, as fluctuations in individual constituents of the index provide opportunities to capture losses. This suggests that investors may get the welcome benefit of potential tax savings during periods of unwelcome market volatility.
The uncertainty effect: Higher volatility can enable more tax-loss harvesting
Tech-enabled tax-smart investing
Due to the effort it takes to loss harvest—selling, identifying a suitable replacement stock, being mindful of the wash-sale rule, and tax reporting—most people historically harvested their losses just once a year, usually at the end of the year when finalizing all taxable activity for the tax year. But waiting meant they missed harvesting all those market dips during the year from which their stocks recovered by year’s end.
Innovations in technology can help you take full advantage of year-round tax loss harvesting, by systematically capturing losses to offset gains, now or in the future, all the while staying close to your objectives.
You can easily make ongoing tax-loss harvesting a feature of how your portfolio is managed. And if you’re going to, you might want to do it right now in this period of market turbulence–as optimizing tax savings can really make a difference in how much of your returns you get to keep.
1Source: J.P. Morgan Asset Management Long-Term Capital Market Assumptions
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.
3After offsetting capital gains, individuals can use up to $3,000 of net capital losses can be used to offset ordinary income, with any amount not utilized carried forward indefinitely. Potential tax savings calculated assuming a $40,000 short-term capital loss from selling Stock A, with that loss offsetting other realized short-term capital gains taxable at a 37% marginal federal income tax rate and subject to the 3.8% surtax on net investment income. State income taxes were not considered. Note that actual tax savings may be higher or lower depending on your individual circumstances.
Tax-loss harvesting may not be appropriate for everyone. If you do not expect to realize net capital gains this year, have net capital loss carryforwards, are concerned about deviation from your model investment portfolio, and/or are subject to low income tax rates or invest through a tax-deferred account, tax loss harvesting may not be optimal for your account. You should discuss these matters with your investment and tax advisors.
4For illustrative purposes only, based on an actual historical scenario. Source: Bloomberg Finance L.P. 1) Tax benefit resulting from realizing a $40,000 short-term loss from selling Stock A, with the loss used to offset $40,000 in short-term gains taxed at 40.8%. Tax benefit can be used to offset realized gains elsewhere in the client’s portfolio this year, or carried forward to future years. Note that the tax benefit is temporary—assuming your portfolio rebounds, tax savings generated by harvesting losses now mean you’ll have a lower cost basis. That, in turn, means that you may have to pay more taxes in the future if you sell at a gain. This tax deferral allows for more of your money to continue to be invested in your portfolio and generate returns, instead of being used to pay taxes. JPMorgan Chase & Co., its affiliates and employees do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.
5Source: J.P. Morgan Asset Management. Realized volatility was calculated as the standard deviation of daily returns for the trading days within the month.
6Source: J.P. Morgan Asset Management. Analysis period: 1993-2024. All data is hypothetical in nature and should not be relied on to reflect actual client experiences or performance. The Analysis is based on back-tested results calculated by creating a simulated cash funded portfolio on the first day of each year, and is subsequently rebalanced each month end when either 1) tax-loss harvesting opportunities were present, or 2) expected tracking error of the portfolio exceeded 1% relative to the model. Each portfolio created is managed in accordance with these rules through the end of 2024. So each portfolio represents the varying experience that an investor may have based on the time frame invested, ensuing market volatility, and subsequent performance of the underlying securities.
The back-tested performance results have certain inherent limitations. Unlike an actual performance record, they do not reflect trading, liquidity constraints, fees and other costs. Also, since the trades have not actually been executed, the results may have under-or-over compensated for the impact of certain market factors such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. These back-tested results do not take into consideration the ongoing implementation of the manager’s proprietary investment strategies. No representation is being made that any portfolio will or is likely to achieve profits or losses similar to those shown. Past performance is not indicative of future results. Returns will fluctuate and an investment upon redemption may be worth more or less than its original value.
Important Information
In the wake of recent market volatility driven by geopolitical tensions and economic policy shifts, investors may have a unique opportunity to leverage tax-loss harvesting.
Published Apr 10, 2025
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