Tax-Loss Harvesting Isn’t Just for Downturns. Here’s Why

Your portfolio might be due for an end-of-the-year cleanup.

Why it matters: The Morningstar US Market Index is up about 15% through mid-November 2025, and overall performance has been strong for years (even after 2022’s down market). That said, some stock sectors have performed significantly better than others, and performance can vary widely even within a sector. That could mean you’re likely holding some winners and some losers. Tax-loss harvesting could help trim your tax bill to save some money. While you’re tuning up your portfolio, it could also be a good opportunity to bring your asset allocation back into balance. Morningstar portfolio strategist Amy Arnott is here to explain how to pull off both strategies.

13 Questions on Tax-Loss Harvesting and Portfolio Rebalancing

1. What is tax-loss harvesting, and how does it work?
2. Is a brokerage or retirement account better suited for tax-loss selling? Why?
3. The US stock market has experienced solid growth so far in 2025. Do up markets make it harder to spot losses?
4. Why is tax-loss harvesting still a good strategy even when times are good?
5. Where can investors find losses to offset gains in their portfolio this year? Let’s start with stocks.
6. And what about mutual funds and ETFs?
7. Can you explain what wash-sale rules are, and how to play by the IRS’ rules?
8. What are some other strategic ways to take advantage of the losses?
9. In the spirit of tuning up our portfolio, this might be a good time to rebalance. How does that work, and why can it be an emotional challenge sometimes?
10. The 60/40 portfolio might need rebalancing. What’s happened over the past decade?
11. And what about growth versus value and US versus international stocks?
12. What are a few tips on how to restore balance to a portfolio?
13. What is the takeaway for taking this time of year to do tax-loss harvesting and rebalancing?

Key Quote on Tax-Loss Harvesting in 2025

If you look at the major market indexes, the gains are pretty strong for the year to date. But as you know, a lot of that has been driven by the securities at the very top of that market-cap range, the Magnificent Seven, AI-driven stocks that have had such enormous gains until the past week or two. If you look kind of lower down in the major market indexes, you can find stocks that actually have losses over the past year or the past couple of years.

The Takeaway: End-of-the-year obligations might be piling up on your plate, but making time for tax-loss harvesting and portfolio rebalancing could pay off when tax season begins. You could help your future self from an investment and/or tax perspective, according to Arnott. The portfolio strategist says rebalancing would bring your portfolio back in line with the risk you want to take, so you’re better off if there’s a larger market downturn.

More From Morningstar on Tax-Loss Harvesting and Portfolio Rebalancing

After figuring out what to sell in your portfolio, be careful to avoid breaking wash-sale rules, says Arnott. The IRS prohibits selling an investment for tax-loss purposes and buying the same thing right away. That would create an artificial loss. Investors should avoid buying what’s considered a substantially identical security. For example, if you sell a fund tracking the S&P 500 and buy another fund also tracking it, that could break rules. However, if you buy a fund tracking a different index, that should be fine.

Watch Morningstar’s Christine Benz and Margaret Giles discuss how to rebalance your portfolio before 2026. Check out an excerpt from The Long View podcast where Ritzholtz Wealth Management’s chief market strategist Callie Cox discusses AI’s growing dominance and its effect on passive investors’ portfolios.

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