Tax-Loss Harvesting Gains Momentum in 2026 as Advisors Seek Tax-Efficient Strategies

• Tax-loss harvesting and other tax-efficient strategies are gaining attention as investors seek to maximize after-tax returns amid increasing capital gains distributions. A growing portion of assets in traditional mutual funds consists of unrealized gains, which can lock investors in less efficient structures according to a mutual fund study.

• Financial advisors are under pressure to meet the rising client expectations for tax planning, with only 25% of clients feeling they receive adequate support despite 92% expecting it. Direct indexing, offering tools like tax-loss harvesting, is still underutilized by only 18% of advisors but is projected to grow at a 12% annual rate.

• As markets evolve and investors become more tax-conscious, the integration of tax-aware strategies into portfolio management is seen as a key differentiator. Advisors who embrace these strategies report improved client retention and deeper engagement.

How Tax-Loss Harvesting Benefits Investors?

• Tax-loss harvesting allows investors to offset capital gains by selling losing investments, potentially reducing overall tax liability. This strategy is especially relevant given that nearly half of the $28.5 trillion in U.S. open-end mutual funds is held in taxable accounts.

• The phenomenon of 'tax lock-in'—where investors are discouraged from switching to more efficient alternatives due to unrealized gains—further underscores the importance of proactive tax strategies. Advisors are increasingly guiding clients toward alternatives like SMAs and ETFs.

What Role Do Advisors Play in Tax-Efficient Investing?

• Advisors who have fully integrated tax-efficient tools such as direct indexing into their practice report significant improvements in client satisfaction and retention. These advisors also see increased wallet share and more meaningful planning discussions with clients.

• The use of direct indexing is not just about tax benefits but also portfolio customization, transparency, and risk management. These elements help reshape the advisory value proposition and align with client expectations of a more personalized investment experience.

• As the industry continues to shift toward retailization and greater investor access to alternatives, advisors who prioritize tax-aware planning are better positioned to meet the evolving needs of clients and maintain a competitive edge.

• Additionally, the 2026 tax code changes—including updated standard deductions and estate tax exemptions— further highlight the need for families to reevaluate their wealth transfer and retirement strategies.

• While tax-loss harvesting is a powerful tool, it is part of a broader suite of strategies that includes maximizing tax-advantaged accounts and strategic asset location. These approaches collectively help investors reduce their tax burden and improve long-term wealth outcomes.