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RIA guide: How to explain tax loss harvesting to clients

Tax loss harvesting can be a confusing topic for clients to understand. This guide gives you simple talking points to help explain it to your clients.

By Betterment Editors

Published Feb. 24, 2025

Tax loss harvesting abacus and calculator

RIA guide: How to explain tax loss harvesting to clients Feb 24, 2025 9:13:37 AM Tax loss harvesting can be a confusing topic for clients to understand. This guide gives you simple talking points to help explain it to your clients. Clients having trouble grasping the concept of tax loss harvesting? From a simple one-sentence explainer to details on how Betterment’s automated Tax Loss Harvesting+ works, we’ve got you covered. Table of Contents: In one sentence: “What is tax loss harvesting?” Five key concepts: The building blocks of tax loss harvesting How does tax loss harvesting work? How Tax Loss Harvesting+ works with Betterment Advisor Solutions How to answer other tax loss harvesting FAQs Explaining complex financial topics to clients is challenging. You want them to understand but, at the same time, not overwhelm them. This guide can help you explain sophisticated tax strategies to your clients without causing extra stress for them. In one sentence: “What is tax loss harvesting?” So, your client asks: “What is tax loss harvesting?” Rather than delivering a complex answer, start with a single sentence: “Tax loss harvesting aims to lower your tax bill by selling investments at a loss to offset capital gains from other investments.” Now, stop there. Ask your client if they want you to break down the details of how it works. If they say yes, start with the five key concepts below. Five key concepts: The building blocks of tax loss harvesting When talking with clients, you can share that these concepts are the building blocks that make tax loss harvesting possible. You can walk through the table below, providing examples to clients. How does tax loss harvesting work? Now that you have explained what tax loss harvesting is in one sentence and shared the five building blocks, you can explain to your client how the process generally works in three steps. Step 1: Identity your capital losses This involves looking for investments in your portfolio that have declined since they were purchased. It’s important to note that we don’t sell any investment that is down in value. We strategically select which investments to sell to help maintain the proper portfolio allocation. Step 2: Sell at a loss and replace your investment Once investments with capital losses have been identified, they are sold to “harvest” the loss. Making sure not to break the “wash sale” rule, new investments are bought to fit into your overall investment strategy. Step 3: Use loss to offset your capital gains or income on your taxes The losses you “harvested” can offset up to $3,000 of capital gains from investments or income each year. Any remaining losses over $3,000 can be carried forward indefinitely to offset gains or income in future years. How Tax Loss Harvesting+ works with Betterment Advisor Solutions It’s important to let your clients know that this is the general process for implementing. Performed manually, it can be time-consuming and potentially risky if done improperly. However, leveraging modern technology, like the Betterment Advisor Solutions platform, can help you minimize risk. As a Betterment advisor, you can offer your clients Tax Loss Harvesting+ (aka TLH+). Read the full TLH+ white paper. Here’s how to talk to your clients about Betterment’s TLH+ process As an advisor, you can use the following talking points: Fully automated: Instead of manually implementing tax loss harvesting, Betterment uses an automated algorithm that regularly checks for losses that make sense to harvest. No extra costs: There are no extra trading costs to harvest your losses, so you don’t have to worry if extra fees reduce any potential gains. Automatic reinvestments: Without breaking the “wash sale” rule, every harvested dollar is automatically reinvested rather than held as cash, which allows you to keep your money in the market so you don’t miss out on potential gains. Automatic rebalancing: When shares are sold at a loss, the proceeds are automatically reinvested in the asset classes that will bring your portfolio back into balance rather than simply defaulting back to the asset class they came from. No short-term capital gains tax: Some tax loss harvesting methods switch back to the primary ETF after the 30-day wash period has passed. This can create short-term capital gains tax that may dramatically reduce the benefit of harvesting losses and even leave you owing more in taxes. Our algorithm only moves back to the primary ETF when it is appropriate for your account. IRA harvest protection: Selling an ETF for a loss in your taxable account and then buying the same ETF in your IRA can cause a permanent wash sale, destroying the benefit of loss harvesting entirely. We strive to ensure that IRA deposits do not undermine a harvest. How to answer other tax loss harvesting FAQs Below are common questions about tax loss harvesting, along with talking points to help you respond to clients within the context of Betterment’s TLH+. Is tax loss harvesting right for me? Tax loss harvesting might be right for you if you are in a higher tax bracket or have significant capital gains or losses in a taxable account. In both scenarios, tax loss harvesting may offset your capital gains to help reduce your tax bill. Using Betterment’s automated technology, we can help harvest losses in a way that reduces potential risks. What are the risks of tax loss harvesting? Risks can include extra trading fees, holding too much cash after selling at a loss, an unbalanced portfolio, or violating the wash sale rule. But don’t worry — our tech is designed to help avoid these risks so you can enjoy the benefits of tax loss harvesting. What are the benefits of tax loss harvesting? The primary benefit of tax loss harvesting can be reducing your tax bill. When done correctly using our automated technology, Betterment can lower the tax you would have paid on your capital gains. What if I have more than $3,000 in losses? You can carry forward any unused losses into future years. For example, if you have $5,000 in losses and use $3,000 to offset capital gains this year, you can carry forward $2,000 to offset capital gains or income in any future year. Can I wait until tax day to sell at a loss? No, unfortunately, tax loss harvesting transactions must be complete by December 31 each year. Can I use tax loss harvesting with any of my investment accounts? Tax loss harvesting can only be used in taxable accounts. In tax-advantaged accounts, like a 401(k), you can’t deduct the losses, so tax loss harvesting wouldn’t be applicable. It’s important to note that selling an asset at a loss in a taxable account can still trigger the wash-sale rule if you purchase the same or a substantially similar asset within 30 days in a tax-deferred account, such as a Roth IRA. For instance, selling an ETF at a loss in a brokerage account and then buying the identical ETF within 30 days in a Roth IRA could still disallow the loss for tax purposes. See how Betterment automates tax loss harvesting and more From our proprietary Tax Loss Harvesting+ process to tax-smart investing portfolios, the Betterment for Advisors Solutions platform streamlines your firm’s practices while creating value for your clients.

Clients having trouble grasping the concept of tax loss harvesting? From a simple one-sentence explainer to details on how Betterment’s automated Tax Loss Harvesting+ works, we’ve got you covered.

Table of Contents:

In one sentence: “What is tax loss harvesting?”
Five key concepts: The building blocks of tax loss harvesting
How does tax loss harvesting work?
How Tax Loss Harvesting+ works with Betterment Advisor Solutions
How to answer other tax loss harvesting FAQs

Explaining complex financial topics to clients is challenging. You want them to understand but, at the same time, not overwhelm them. This guide can help you explain sophisticated tax strategies to your clients without causing extra stress for them.

In one sentence: “What is tax loss harvesting?”

So, your client asks: “What is tax loss harvesting?”

Rather than delivering a complex answer, start with a single sentence:

“Tax loss harvesting aims to lower your tax bill by selling investments at a loss to offset capital gains from other investments.”

Now, stop there.

Ask your client if they want you to break down the details of how it works. If they say yes, start with the five key concepts below.

Five key concepts: The building blocks of tax loss harvesting

When talking with clients, you can share that these concepts are the building blocks that make tax loss harvesting possible. You can walk through the table below, providing examples to clients.

How does tax loss harvesting work?

Now that you have explained what tax loss harvesting is in one sentence and shared the five building blocks, you can explain to your client how the process generally works in three steps.

Step 1: Identity your capital losses

This involves looking for investments in your portfolio that have declined since they were purchased.
It’s important to note that we don’t sell any investment that is down in value. We strategically select which investments to sell to help maintain the proper portfolio allocation.

Step 2: Sell at a loss and replace your investment

Once investments with capital losses have been identified, they are sold to “harvest” the loss.
Making sure not to break the “wash sale” rule, new investments are bought to fit into your overall investment strategy.

Step 3: Use loss to offset your capital gains or income on your taxes

The losses you “harvested” can offset up to $3,000 of capital gains from investments or income each year.
Any remaining losses over $3,000 can be carried forward indefinitely to offset gains or income in future years.

How Tax Loss Harvesting+ works with Betterment Advisor Solutions

It’s important to let your clients know that this is the general process for implementing. Performed manually, it can be time-consuming and potentially risky if done improperly.

However, leveraging modern technology, like the Betterment Advisor Solutions platform, can help you minimize risk. As a Betterment advisor, you can offer your clients Tax Loss Harvesting+ (aka TLH+). Read the full TLH+ white paper.

Here’s how to talk to your clients about Betterment’s TLH+ process

As an advisor, you can use the following talking points:

Fully automated: Instead of manually implementing tax loss harvesting, Betterment uses an automated algorithm that regularly checks for losses that make sense to harvest.
No extra costs: There are no extra trading costs to harvest your losses, so you don’t have to worry if extra fees reduce any potential gains.
Automatic reinvestments: Without breaking the “wash sale” rule, every harvested dollar is automatically reinvested rather than held as cash, which allows you to keep your money in the market so you don’t miss out on potential gains.
Automatic rebalancing: When shares are sold at a loss, the proceeds are automatically reinvested in the asset classes that will bring your portfolio back into balance rather than simply defaulting back to the asset class they came from.
No short-term capital gains tax: Some tax loss harvesting methods switch back to the primary ETF after the 30-day wash period has passed. This can create short-term capital gains tax that may dramatically reduce the benefit of harvesting losses and even leave you owing more in taxes. Our algorithm only moves back to the primary ETF when it is appropriate for your account.
IRA harvest protection: Selling an ETF for a loss in your taxable account and then buying the same ETF in your IRA can cause a permanent wash sale, destroying the benefit of loss harvesting entirely. We strive to ensure that IRA deposits do not undermine a harvest.

How to answer other tax loss harvesting FAQs

Below are common questions about tax loss harvesting, along with talking points to help you respond to clients within the context of Betterment’s TLH+.

Is tax loss harvesting right for me?

Tax loss harvesting might be right for you if you are in a higher tax bracket or have significant capital gains or losses in a taxable account. In both scenarios, tax loss harvesting may offset your capital gains to help reduce your tax bill. Using Betterment’s automated technology, we can help harvest losses in a way that reduces potential risks.

What are the risks of tax loss harvesting?

Risks can include extra trading fees, holding too much cash after selling at a loss, an unbalanced portfolio, or violating the wash sale rule. But don’t worry — our tech is designed to help avoid these risks so you can enjoy the benefits of tax loss harvesting.

What are the benefits of tax loss harvesting?

The primary benefit of tax loss harvesting can be reducing your tax bill. When done correctly using our automated technology, Betterment can lower the tax you would have paid on your capital gains.

What if I have more than $3,000 in losses?

You can carry forward any unused losses into future years. For example, if you have $5,000 in losses and use $3,000 to offset capital gains this year, you can carry forward $2,000 to offset capital gains or income in any future year.

Can I wait until tax day to sell at a loss?

No, unfortunately, tax loss harvesting transactions must be complete by December 31 each year.

Can I use tax loss harvesting with any of my investment accounts?

Tax loss harvesting can only be used in taxable accounts. In tax-advantaged accounts, like a 401(k), you can’t deduct the losses, so tax loss harvesting wouldn’t be applicable. It’s important to note that selling an asset at a loss in a taxable account can still trigger the wash-sale rule if you purchase the same or a substantially similar asset within 30 days in a tax-deferred account, such as a Roth IRA. For instance, selling an ETF at a loss in a brokerage account and then buying the identical ETF within 30 days in a Roth IRA could still disallow the loss for tax purposes.

See how Betterment automates tax loss harvesting and more

From our proprietary Tax Loss Harvesting+ process to tax-smart investing portfolios, the Betterment for Advisors Solutions platform streamlines your firm’s practices while creating value for your clients.

Turn tax management into a competitive advantage — set up a demo today.