This year the rush to use tax-loss harvesting at year-end isn't going to be as prominent as in the past. Some people have been using it for six months, if not longer, and the market's moves have taken the option away from many investors who waited.
Investors have traditionally turned to year-end tax-loss harvesting to use some of their losses to offset gains, but periods of volatility throughout the year — including the tariff-induced volatility in April — offered better opportunities.
Fifteen-year muni yields started this year at 3.27%, jumped to 4.24% by mid-April due to robust supply and tariff-related volatility, dropped back to 3.71% in early May, then climbed once more to 4.00% in late July, said AllianceBernstein strategists.
"These sharp moves in interest rates presented several opportunities for managers to harvest losses and create tax savings for clients," they said.
Since the start of August, muni yields have fallen 69 basis points and were at 3.29% as of Oct. 31, AllianceBernstein strategists said.
"That strong rally boosted muni bond prices and erased nearly all tax-loss harvesting opportunities for the year," they said.
And unless there is a massive selloff in the next two weeks, there will not be a major spike in market participants using tax-loss harvesting through year-end, said Ben Barber, director of municipal bonds at Franklin Templeton.
"Interest rates move throughout the year, and those who wait until year-end to harvest tax losses may find there's nothing left to harvest," AllianceBernstein strategists said. "With portfolio losses erased, the likelihood of a bigger tax hit is looming."
Tax-loss harvesting has been minimal at year-end, according to data.
"Secondary trades in the last month actually show a much larger dealer-to-customer bias than would be the case if tax loss activity were active," said Kim Olsan, senior fixed income portfolio manager at NewSquare.
MSRB data shows 60% of trades across all maturity buckets have been customer buys, she said.
Of the tax-loss harvesting happening, some of it may be automatic, said Matt Fabian, president of Municipal Market Analytics.
Last year and early in 2025, there was an increasing rollout of tax-aware separately managed accounts, he said.
"If there's a gain to the customer to do, even if it's a small one, because it's so automated and scaled up when there's any opportunity to do tax loss swap through a tax-aware SMA, it probably gets done," Fabian said.
Several years ago, there was a big sell-off in the muni market. Since then, there have been ups and downs, and "people have purchased at different periods that they've become more accustomed to utilizing tax loss selling earlier in the year, particularly when they've seen such tremendous growth in other assets like equities," said Jeff Timlin, a partner at Sage Advisory.
"People say, 'I got these large gains that I've taken, captured, and where can I offset it?'" he said. This year, more investors
have been proactive and used tax-loss harvesting earlier, rather than waiting until the last minute, Timlin said.
Advisors tend to think about tax loss harvesting only at the end of the year, which is "always really frustrating for all of us, but you sort of acknowledge it and figure it out," Barber said.
Saving tax-loss harvesting for year-end has its risks, as the market demonstrated this year: The losses market participants are looking for may not have occurred, the market might have since recovered from earlier losses, the bonds market participants are searching to replace with may be in short supply, or the bid side market participants are looking to sell may be weaker than during other times in the year, said John Dillon, managing director and SMA portfolio manager at Parametric.
And by implementing systematic tax-loss harvesting year-round, as Parametric does, it "affords you the ability to take losses as they occur and replace the bonds very quickly while the supply is there," Dillon said.
Overall, the marketplace has changed. The traditional year-end approach to tax-loss harvesting disadvantages investors, Dillon said.
"The better way, the more efficient way, is to do this year-round. It's not something most people will think about in February or June. It's a great time to get these trades done, provided the market gives you that opportunity," he said.
