Tax Loss Harvesting

Today’s post looks at Tax Loss Harvesting.

Tax Loss Harvesting

Tax Loss Harvesting (TLH) is when an investor sells holdings at a loss to offset those losses against gains elsewhere.

• If your losses exceed your gains, you can carry what remains forward to future tax years.
• In the US, $3K of losses can also be set against income tax, but CGT and income tax are kept separate in the UK.

The hard-to-follow part is how this helps, unless you have gains outside the TLH account that you need to offset.

• Otherwise, it just means that you can liquidate a fair portion of your account without net gains, which is simply a product of granularity.
• Strictly, one winner and one loser is all you need, but the more lines you hold, the more the numbers work in your favour.

With the CGT allowance now at £3K pa, these are slim pickings.

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I have never actively used a TLH strategy, but it looks as though I might need to in the near future.

• The closest I have been to TLH in the past is keeping track of the capital gains in my GIA to make sure that I didn’t exceed the ever-shrinking annual allowance.

Then in 2024 I closed all my taxable accounts in order to buy a house by the sea.

• But now I’m in the process of selling my London house, and I should have some taxable money once more.

And it looks as though new PM Andy Burnham will equalise CGT rates with income tax, which will make minimising CGT highly rewarding.

US vs UK

TLH (and tax planning in general) is more popular in the States than over here.

• They have two rates of CGT: short-term holdings are punished, and investors are keen to avoid paying this rate.
• Across the pond, brokerages and robo-advisors will operate TLH on your behalf, but over here it’s strictly a manual affair.

The snag with TLH is that when you sell an asset, you lose exposure to it. 

• And if you buy it back within 30-days (in the US), you fall foul of the “wash sale” rules and you can’t claim the loss.
• Similar restrictions apply in the UK around “bed and breakfasting” or “bed and ISA” strategies.

The fix is to replace the sold asset with a similar but not legally identical exposure.

• This is easy with ETFs (just use a different provider) but requires more thought with individual stocks.

Alternatively, you can look at your portfolio allocations in a top-down fashion, and replace taxable sales with tax-sheltered purchases.

Direct Indexing

Another spin on TLH is Direct Indexing (DI), which is again more popular in the US than over here. 

• This takes TLH to a different level, replicating an index within an individual investor’s account by buying all of the constituent shares.

Obviously, technical and regulatory advances (such as fractional shares) underlie this approach.

DI can also be used to remove “problematic” index constituents from an investor’s portfolio. 

• But tax is usually the motivation.

To me, DI is worse than TLH, because the wash sale rule has real consequences.

• Trading costs are also a potential issue.

Leverage and Shorting

Another twist is to add, say, 30% leverage to a portfolio, and also short 30% of the portfolio.

• You now have a 130/30 portfolio with a net exposure of 100% but lots more opportunities for TLH.

Here in the UK, you would probably need to use CFDs for the short side, as spread bets are outside of the CGT system.

• Thinking about it, CFDs would probably also be the easiest way to add taxable leverage, since most leveraged index ETFs in the UK are only 2X.

Tax Alpha

The FT recently reported on a new wave of TLH called tax alpha and pioneered by firms like AQR and Quantino (founded in 2018 by a group of former AQR traders).

• Hedge funds didn’t historically focus on taxes because their typical clients (pensions and endowments) were often not taxable.

The tax alpha funds aim to both beat the market and save you tax.

• Since they are leveraged long/short funds, they also claim to work in up and down markets.

AQR said:

Without pre-tax alpha, these strategies are not worth the fees. This business is the culmination of our longstanding focus — producing attractive investment returns while helping taxable investors keep more of what they earn.

AQR now has a third of its assets in these funds, and along with Quantino, added $86 bn in assets over 15 months to April 2026.

Commentators in the FT article speculated that a Democratic White House (possibly as soon as 2028) might target the strategies, though it’s hard to see how any rules are being broken.

• In essence,  the tax liability is being moved through time, as with most tax strategies.

The real benefit comes (to your descendants, not you) if you hold until death, when the capital gains uplift removes the liability.

Conclusions

I have a few more articles on TLH to review, but they can wait for a second post.

• They are from Victor Haghani and James White at Elm Wealth, so I am reasonably optimistic they will be interesting.

At the moment, I’m not sure how great an advantage TLH provides.

• Like most tax strategies, it’s essentially a deferral, not an avoidance.

That’s not nothing – we all consume each year and get new tax shelter allowances each year – but it’s not a massive bonus.

• As they say at Tesco, every little helps, but the admin for TLH in the UK looks significant, and the game might not be worth the candle.

I guess we’ll find out next time.

• That’s it for today.