Tax-Loss Harvesting in Q4: Why Advisors Should Act Now

As we navigate the final quarter of 2025, advisors are finding themselves with only a few short weeks left to take advantage of tax-loss harvesting opportunities. It’s in these final weeks where the gap between what an advisor (or their client) might hope to achieve with tax management and what their tech systems actually allow becomes glaringly obvious. 

It’s a little pressure-filled, depending on how portfolios have been managed up to this point. But it’s also exactly why Q4 offers some of the richest opportunities for generating tax alpha—so long as advisors aren’t relying on manual processes or last-minute scrambling.

Direct indexing and automated loss harvesting have reshaped what’s possible to achieve in this period (case in point, Cerulli reported growth to over $864 billion in direct indexing by the end of 2024). 

But even if an advisor isn’t using automation yet, understanding the pattern of Q4 tax behavior can meaningfully improve results.

Below is a clear framework for why Q4 matters, how you can avoid missing opportunities, and what it looks like to approach this season with precision.

The Q4 Advantage: Why This Window Matters So Much

The mechanics of Q4 create a rare alignment of factors that make tax-loss harvesting both more necessary and more effective.

Most mutual funds distribute gains later in the year, especially in December. You can’t control these distributions, but you can offset them.

At the same time, market dispersion tends to widen as year end positions drive sector rotations.  

This environment, combined with clear visibility into year to date tax obligations for advisors, enables precision planning and acting in October to November provides crucial flexibility to navigate wash sales rules without the constraints that emerge in late December.

Here’s an example of how tax loss harvesting can neutralize the impact of mutual fund distributions:

• Mutual Fund Value: $200,000 
• Distribution: 10% = $20,000
• Capital Gain Tax (20%): $4,000 owed 
• Tax loss harvest benefit if you harvested $20,000 in losses for your client their tax bill drops from $4,000 to $0.
  
  

In other words: Q4 is your last chance to neutralize a client’s biggest unavoidable tax hit of the year.

Why Direct Indexing Changes Everything about Tax-Loss Harvesting in Q4

Mutual funds and ETFs let you harvest losses at the fund level. Direct indexing lets you harvest across every security inside the fund, creating significantly more opportunity, especially when dispersion is high and year-end volatility picks up.

This also unlocks something a large segment of advisors want but rarely have time for:
continuous, systematic harvesting through the year instead of one rushed December session.

Automation makes it possible to:

• Monitor portfolios daily
• Capture losses at the moment they are meaningful
• Map replacements systematically
• Maintain risk alignment throughout the process

With the right technology and workflow setup, direct indexing doesn’t require more work or manual tasks. It does, however, enable a more intelligent and intentional approach to tax optimization.

The Tax Strategies Advisors Should Revisit in Q4

These strategies aren’t new, but they become significantly more powerful when paired with direct indexing and automation.

In particular, cost basis shifting involves strategically selecting which tax lots to sell or donate, effectively managing your portfolio’s embedded tax liability. 

In a rising market, investors often accumulate positions with vastly different cost basis from shares purchased at market lows to recent acquisitions at higher prices.

 
Here are some cost basis shifting strategies to know: 

1. Specific lot identification

If you typically look at unrealized P/L totals, the real leverage is in the tax lots. Selling high-basis lots minimizes gains and creates flexibility for future rebalancing.

Example:

You own three tax lots of MSFT purchased at different prices.

Selling the highest-cost lot (Lot 3) results in a $20/share gain, compared to $110/share if Lot 1 were sold.

This choice reduces the taxable gain by 82 percent.

2. Tax Lot Optimization Across the Entire Portfolio

This strategy realizes losses from high-basis lots while keeping low-basis shares invested to continue compounding.

Example:

Two lots of the same stock:

Selling Lot B generates a $30 loss that can be used to offset gains, while Lot A remains invested with its low cost basis and long-term upside.

This is the heart of tax alpha and is one of the clearest advantages of security-level personalization.

3. Asset Location (the most overlooked Q4 opportunity)

Q4 is the perfect time to realign account-level asset placement before January contributions begin. Allocating investments to the most tax-efficient account type can significantly improve after-tax returns. High-growth assets are generally best placed in Roth IRAs or other tax-advantaged accounts.

The same $10,000 investment behaves very differently depending on account type:

In taxable accounts:

• Grows to $20,000
• $10,000 gain leads to approximately $2,000 in taxes

In a Roth:

• Grows to $20,000
• All $10,000 of growth is tax-free

Asset location preserves the full value of the investment and eliminates tax drag.

4. Gifting Appreciated Shares

Q4 is gifting season, both literally and figuratively!

Gifting low-basis shares to family members in lower tax brackets transfers both wealth and built-in gains efficiently, and in some cases can eliminate capital gains entirely.

If shares with a $20 basis have appreciated to $80, the embedded gain transfers with the gift, often into a 0–10% bracket.

Example:

• Shares with a $20 basis now worth $80 are gifted to a family member in the 0–10% capital gains bracket.
• If they later sell the shares, they may pay little to no tax on the $60 gain.

This is one of the simplest ways to create intergenerational tax efficiency.

5. Charitable Giving Using Appreciated Securities

Advisors who pair philanthropy with tax management win twice. How?

• Clients get a full deduction for the fair market value
• They avoid capital gains entirely
• A charity receives the shares tax-free

Example:

• You donate shares worth $10,000 with a $4,000 cost basis.
• You receive a $10,000 charitable deduction and avoid tax on the $6,000 unrealized gain.
• The charity receives the full value, tax-free.

This is particularly powerful when advisors combine Q4 giving with tax-loss harvesting elsewhere to rebalance back to target.

6. Preventing Portfolio Ossification Over Time

One of the hidden costs of long-term investing is what happens when you do nothing. As positions appreciate, advisors often avoid realizing gains, which leads to portfolios slowly “ossifying” into their legacy allocations.

Over time, then, ossification leads to reduced flexibility, portfolio drift, and concentrated positions.

7. Net out gains and losses

If this isn’t necessarily a year you want to maximize your losses, you can offset all possible losses with gains, thereby shifting your cost basis for a wide pool of securities.

This strategy reduces ossification, bringing more securities into play for future tax-loss harvesting opportunities, and reducing your future tax liability.

Get a Q4 Tax-Loss Harvesting Checklist for Advisors

To help you make sure you’re checking off all the boxes for improving after-tax outcomes before December 31, we’ve created a short checklist to guide your way.

Click here to download it, print it, and share it with others in your office.

Tax-Loss Harvesting FAQs

Is tax-loss harvesting still worthwhile in a rising market?

Yes. Dispersion means some securities fall even when an index rises. Direct indexing expands the opportunity set dramatically, and long/short direct indexing makes it even more feasible to harvest losses in any market environment.

Can I still tax-loss harvest in December?

Of course, but waiting until the very end of the year creates less flexibility. Replacement options narrow, and wash-sale windows become tight.

Do mutual fund distributions make Tax-Loss Harvesting more important?

Yes, mutual fund distributions \create unavoidable gains. Intentional tax-loss harvesting, however, can offset them entirely.

Is automated harvesting through the year better than year-end harvesting?

Systematic harvesting across the year generally captures more losses with narrower tracking error and less manual effort.

Q4 Rewards Advisors Who Act Early and with Precision

The convergence of optimal market conditions and technological capabilities makes this Q4 particularly compelling for tax-loss harvesting implementation. 

The firms that successfully harness these trends, particularly through sophisticated direct indexing and systematic tax-loss harvesting approaches, will deliver meaningful value to their clients while positioning themselves at the forefront of the industry’s evolution.