Most advisors harvest losses in December. We engineer them a decade in advance: direct indexing started early, long-short overlays that multiply harvesting capacity, ordinary-loss strategies that reach W-2 income, and deductions taken at the wellhead. Institutional tools, sequenced around the liquidity events your plan can already see coming.
Because we do deep planning first, we often know a client will face a large taxable event years before it arrives: a company sale, expiring options, a final tranche of vesting. That foresight is the whole edge. This message explains how we begin banking tax losses long before the year they matter, inside portfolios that are simply doing their job.
Loss harvesting is not guaranteed and depends on market conditions, funding, and individual circumstances. Personalized illustrations are available at your consultation.
The first question every client asks: does my account have to go down for me to get tax losses? No. Understanding why is the key to everything on this page.
In a tax-aware strategy, harvested losses are generated by the trading inside the account. A diversified portfolio always contains individual positions that are down at any given moment, even in a strong year. Those positions are sold, the losses are realized, and the proceeds move into similar but not identical holdings so the portfolio's market exposure never changes. The losses are real to the IRS the day they are booked.
The account's return is a different question entirely. It is the sum of everything inside, winners included, and the portfolio is engineered to track its index. So the expected pattern, not the exception, is an account that rises in value while simultaneously realizing meaningful losses for tax purposes. The losses are paper to the portfolio and real to the tax return.
This is why the strategy works in most market environments. Equity indexes have finished positive in most calendar years historically, which means the typical year hands you both outcomes at once: growth at the account level and harvestable losses at the position level. A down year simply shifts where the losses come from, not whether they exist.
The harvested losses accumulate as a carryforward, a stored tax asset with no expiration under current federal law. When the gain event finally arrives, the sale of a business, a concentrated position unwound, options exercised and sold, the carryforward absorbs it. The tax planning happened years earlier, quietly, inside a portfolio that was tracking its benchmark the entire time.
The account grew and tracked its benchmark. Nothing about the year looks unusual on a statement.
Purely illustrative. Loss generation depends on strategy, market conditions, and funding, and is not guaranteed. Account values can decline.
Standard direct indexing is where tax-aware investing begins: own the index as individual stocks instead of a fund, and harvest the losers as they appear. It works. It is also slower and more perishable than the industry admits.
The known weakness is ossification. As positions appreciate, fewer and fewer lots sit below cost, and after several years most of the portfolio is at a gain with little left to harvest. A direct indexing account opened casually, without a plan for the losses, spends its best harvesting years generating a tax asset nobody has a use for and its later years generating very little at all.
The Wealthstone difference is foresight. Because the planning work comes first, we know a client's career arc, equity compensation trajectory, and how their industry tends to pay and exit its people. That often means we can see the need for tax losses ten to twenty years ahead: a probable company sale, options with a fixed expiration, a founder's eventual exit. Capital losses carry forward indefinitely, so we start the harvesting engine now, inside a normal diversified portfolio, and let the carryforward compound toward the year it matters.
Most advisors treat loss harvesting as a year-end chore. Planned early, it becomes a stored tax asset waiting for the largest taxable event of your life.
Broadly available at meaningful account sizes. The gentlest of the four tiers, and the foundation for the rest.
The institutional answer to ossification: expand the surface area losses can be harvested from, without changing what the portfolio is exposed to.
A leveraged long-short tax-aware portfolio, from a 130/30 construction up to extensions in the range of 250/150, holds more longs and adds short positions while keeping net market exposure near 100%. The account still closely tracks an index such as the S&P 500. What changes is the machinery underneath: in rising markets the short book generates harvestable losses, and in falling markets the long book does. There is always a side of the portfolio producing raw material, in either direction, year after year.
The published research is direct on the magnitude. A 130/30 cash-funded portfolio generates roughly 2.7 times the capital losses of long-only direct indexing over its first decade, and the advantage persists rather than decaying, because the short book refreshes the harvesting opportunity that appreciation would otherwise exhaust.
For concentrated holders there is a second door in. These strategies can be funded with an appreciated concentrated position: the position collateralizes the long-short overlay, so diversification and loss generation begin without selling everything first. The losses generated can then be spent unwinding the position itself. In some client engagements, investors in strategies of this kind have realized multiple seven figures of capital losses within a few years, materially reducing taxes on gains elsewhere. Results depend on market conditions, funding, and individual circumstances, and are not typical or guaranteed.
We model the expected loss generation net of these costs before recommending anything.
Capital losses have a ceiling: beyond offsetting capital gains, they can absorb only $3,000 of ordinary income a year. For a client whose tax problem is a large W-2, a bonus, or other ordinary income, capital losses barely reach it. A small set of institutional strategies is built for exactly that gap.
These strategies use instruments such as notional principal contracts, where terminating a contract early can produce an ordinary loss rather than a capital loss, while the overall program maintains index-like market exposure. Ordinary losses are deductible against wages, bonus income, and other ordinary income without the $3,000 limitation, which places them in a different category of usefulness for high earners.
AQR's Delphi strategy is a named example of the category. In one recent year, a strategy of this kind generated ordinary losses equal to roughly 31% of invested capital while maintaining its market exposure. Almost no advisory firms work with these strategies at all; they sit at the far end of the sophistication curve, and they demand more diligence, not less, from everyone at the table.
That table must include your CPA. We do not implement an ordinary-loss strategy without the client's tax professional reviewing the structure, the reporting, and the fit against the rest of the return. This is a deliberate constraint, not a formality.
One of the few remaining places in the tax code where a large, first-year deduction against ordinary income still exists by design.
Direct working-interest participation in oil and gas drilling programs allows intangible drilling costs, typically a large majority of the initial investment, to be deducted against ordinary income in year one. That includes W-2 income. Congress has preserved this treatment for decades as a deliberate incentive for domestic energy development, which makes it structurally different from strategies that depend on interpretive positions: the deduction is the explicit point of the statute.
Once wells produce, depletion allowances shelter a portion of the ongoing income stream, so the tax character of the investment remains favorable beyond the first year. For a high earner with a spike year, a large bonus, a deferred compensation payout, an unusually heavy vesting schedule, a properly sized program can address ordinary income that almost nothing else on this page reaches at comparable scale.
It is also a real investment in a hole in the ground, and we underwrite it that way. The tax treatment is only worth having if the program itself is worth owning, so operator quality, basin economics, and structure come before any discussion of the deduction.
These strategies earn their complexity only when there is real income or a real gain to offset. Four profiles account for nearly everyone we do this work for.
Large W-2 and bonus income that capital losses cannot reach. Ordinary-loss strategies and wellhead deductions exist for this profile.
A position that must eventually be unwound, and a vesting calendar that says when. The overlay can be funded by the position itself.
Concentrated stock planning →The single largest gain of a career, visible years in advance. Every year before the close is a year the carryforward can grow.
Business exit planning →Real estate, funds, legacy positions. Gains that will be realized someday meet losses that never expire.
The full architecture behind these strategies, including how the planning work identifies the future tax event in the first place, is covered at length in Zak's book.
Yes. Loss harvesting, long-short portfolio construction, and intangible drilling cost deductions are established strategies grounded in current law, some of them decades old. Execution is what matters: wash-sale rules, the economic-substance doctrine, and holding-period requirements are respected in every implementation, and we execute alongside your CPA rather than around them. The strategies that draw regulatory attention are the ones done carelessly, and carelessness is a choice.
No, and this is the most important thing to understand about everything on this page. The harvested losses come from individual positions inside the account that are sold when they decline, while offsetting positions gain. The account as a whole is built to track its index, so it is common for an account to rise in value in the same year it realizes meaningful losses for tax purposes. Account values can still decline when markets decline. What the strategy never does is manufacture losses by giving up return.
Wealthstone is a fee-only registered investment adviser: an advisory fee on managed assets, quoted in advance, with no commissions and no product incentives. The institutional strategies described here carry their own management fees and, where leverage is involved, margin and borrow costs. We model the expected tax benefit net of all costs before recommending anything, and if the arithmetic does not clear the bar, we say so.
Direct indexing is broadly available at meaningful account sizes. Long-short tax-aware strategies, ordinary-loss strategies, and direct oil and gas participation generally require accredited investor or qualified purchaser status, larger minimums, and a suitability review covering leverage, liquidity, and time horizon. The gating question is less about wealth than about usefulness: whether you have, or can foresee, the income or gains that make engineered losses worth owning.
Earlier than feels necessary. Capital losses carry forward indefinitely, and a portfolio's harvesting capacity is highest in its early years, before positions appreciate past their cost basis. If you can foresee a liquidity event, a company sale, or expiring options anywhere in the next two decades, the losses you will want in that year are cheapest to begin banking now, inside a portfolio that would be tracking its index anyway.
A private consultation, your numbers, and a written tax architecture you keep.
Important disclosures. This page is educational only and does not constitute tax, legal, or investment advice, an offer, or a recommendation of any security or strategy. Consult your CPA and other professional advisers regarding your specific situation before acting on anything described here. The strategies discussed involve material risks, including leverage, short selling, derivatives, tracking error (which can be material), illiquidity, and the possibility of loss; account values can decline. Loss generation depends on market conditions, funding, and individual circumstances, and is not guaranteed; illustrations and cited research figures are historical or hypothetical and are not predictions. Several strategies described are available only to accredited investors or qualified purchasers and are subject to additional eligibility, minimum, and suitability restrictions. Tax law may change, and tax treatment of certain instruments, including derivatives-based ordinary-loss strategies, is subject to elevated IRS scrutiny and could be challenged or revised. Named third-party strategies are illustrative references for education only, not offers, endorsements, or recommendations, and Wealthstone is not affiliated with the firms named. Past performance is not indicative of future results.
