Tax-Loss Harvesting: How Robo-Advisors Can Save You Money

17 August 2025

Investing is all about growing your wealth, but what if I told you there's a smart way to actually save money while investing? Enter tax-loss harvesting—a powerful strategy that can reduce your tax bill and keep more money in your pocket. And the best part? You don’t have to do the heavy lifting yourself. Robo-advisors have stepped up, automating this once complicated process and making it accessible to everyday investors.

Let's break it all down—what tax-loss harvesting is, how it works, and why robo-advisors might just be the key to maximizing your after-tax returns.

What Is Tax-Loss Harvesting?

Tax-loss harvesting is a tax strategy that involves selling investments at a loss to offset capital gains. In simple terms, it’s like using one bad investment to cancel out the taxes you owe on a profitable one. This helps lower your tax liability and can lead to significant savings over time.

How Does It Work?

Here’s a basic step-by-step breakdown:

1. Sell Underperforming Investments – The process starts by selling stocks, ETFs, or mutual funds that have declined in value.
2. Offset Gains – The losses from those sales are used to reduce or eliminate taxable capital gains from other investments.
3. Reinvest the Proceeds – To maintain your portfolio balance, the proceeds are often reinvested into similar but not identical assets (to avoid the IRS 'wash-sale' rule).
4. Reduce Your Tax Bill – These losses can offset up to $3,000 of your regular income per year (if losses exceed your gains), and any unused losses can be carried forward to future years.

It’s like getting a second chance with your losing investments—turning financial lemons into lemonade.

The Benefits of Tax-Loss Harvesting

Why should you care about tax-loss harvesting? Because it can keep more of your hard-earned money working for you.

1. Lower Your Tax Bill

The most obvious benefit is minimizing how much you owe in taxes. By strategically selling losing investments, you can reduce your taxable capital gains, translating into lower tax payments.

2. Boost After-Tax Returns

Since you’re keeping more of your money invested (rather than handing it over to the IRS), your portfolio benefits from compounding over the long run.

3. Offset Ordinary Income Taxes

If your capital losses exceed your gains, you can apply up to $3,000 per year toward reducing your ordinary taxable income (such as wages or salary).

4. Carry Forward Losses

Not all losses are used in a single year. If your capital losses exceed that $3,000 limit, you can carry them forward indefinitely, helping to lower taxes in future years.

Tax-loss harvesting isn’t just a fancy investment trick—it’s a legitimate way to improve portfolio efficiency while keeping Uncle Sam’s hands off more of your money.

The Problem with Manual Tax-Loss Harvesting

While tax-loss harvesting is a great strategy, it’s traditionally been a headache for individual investors.

1. Time-Consuming

Manually identifying which stocks to sell, calculating tax implications, and making sure you comply with IRS rules takes time—time that most investors don’t have.

2. Complicated IRS Rules

The IRS has strict regulations, like the wash-sale rule, which prevents you from repurchasing the same or a "substantially identical" security within 30 days of selling it for a loss. If you violate this rule, you can’t claim the tax benefit.

3. Emotional Investing Decisions

Let’s be honest—most investors struggle with emotional decision-making. Selling an underperforming stock isn’t easy, and some people hold on too long, hoping for a rebound. This hesitation can cost tax-saving opportunities.

This is where robo-advisors shine.

How Robo-Advisors Automate Tax-Loss Harvesting

Robo-advisors are automated investment platforms that use algorithms to manage portfolios efficiently. One of their most valuable features? Automated tax-loss harvesting.

1. Continuous Monitoring

Unlike a human investor who may check their portfolio occasionally, robo-advisors scan accounts daily for tax-loss harvesting opportunities. They don’t wait until the end of the year—they take action throughout the year, maximizing potential savings.

2. Automatic Trades

When they find an opportunity, robo-advisors execute trades automatically. No more manually tracking losses, selling assets, or worrying about compliance with tax laws—the algorithm does the heavy lifting.

3. Wash-Sale Rule Compliance

Robo-advisors are programmed to avoid the IRS wash-sale rule by reinvesting in similar, but not identical, securities. This keeps your portfolio balanced while staying within tax guidelines.

4. Seamless Reinvestment

Once a losing asset is sold, the robo-advisor reinvests the proceeds into comparable investments, ensuring market exposure remains intact while optimizing for taxes.

In short, robo-advisors take a complex tax strategy and make it effortless.

Best Robo-Advisors for Tax-Loss Harvesting

Not all robo-advisors offer tax-loss harvesting, and some do it better than others. Here are three of the most popular platforms that excel in this area:

1. Wealthfront

- One of the pioneers in automated tax-loss harvesting.
- Offers daily tax-loss harvesting and direct indexing for high-net-worth investors.
- Provides tax-efficient strategies like asset location optimization.

2. Betterment

- Uses a tax-smart algorithm to maximize savings.
- Integrates tax losses with other tax-efficient strategies like tax-coordinated portfolios.
- No minimum account balance required.

3. Schwab Intelligent Portfolios

- Includes tax-loss harvesting for balances over $50,000.
- Invests in a diversified portfolio of ETFs.
- Offers automatic rebalancing to maintain a tax-efficient portfolio.

Each platform has its pros and cons, but if tax-loss harvesting is your goal, these robo-advisors are worth considering.

Is Tax-Loss Harvesting Right for You?

While this strategy has clear benefits, it’s not for everyone. Here are a few things to consider:

When Tax-Loss Harvesting Makes Sense:

✔️ You have taxable investment accounts (not retirement accounts like Roth IRAs).
✔️ You have capital gains or high taxable income that could be offset.
✔️ You’re in a high tax bracket and looking to maximize after-tax returns.

When It May Not Be Worth It:

❌ Your investment portfolio is small, and tax savings wouldn’t be substantial.
❌ You don’t have capital gains or much taxable income to offset.
❌ You’re investing in a tax-advantaged account where tax-loss harvesting doesn’t apply.

For many investors, especially those with growing portfolios, taking advantage of this strategy can mean saving thousands of dollars over time.

Final Thoughts

Tax-loss harvesting used to be an advanced strategy reserved for the wealthy or professional portfolio managers. But with the rise of robo-advisors, anyone can now take advantage of this tax-saving opportunity without the hassle.

By automating the process, robo-advisors help investors minimize taxes, stay invested, and compound wealth over time—all without lifting a finger. If you’re serious about maximizing your after-tax returns, it might be time to let a robo-advisor do the heavy lifting for you.

So, why pay more in taxes than you have to? Let tax-loss harvesting work in your favor, and keep more of your investment gains where they belong—in your pocket.