Tax-Loss Harvesting vs. ‘Waiting It Out’: When Each Strategy Wins

There’s a moment almost every long-term investor recognizes. You open your portfolio after a rough few months. The red numbers stare back. The fund you bought at “a good price” is down 20%. The stock everyone at work loved is underwater. And the question shows up, quietly but firmly:

“Do I just wait this out… or is there something smarter I should be doing?”

Most people default to one of two scripts:

• “Just hold. Markets recover. Don’t touch it.”
• “Sell and lock something in… I heard about this ‘tax-loss harvesting’ thing.”

Both instincts come from a real place.
Both can be right.

The work, and where I spend a lot of time with clients, is understanding when each strategy actually wins.

Let’s break this down in plain language.

First, what tax-loss harvesting actually is

Tax-loss harvesting sounds technical, but the core idea is simple.

You:

• Own an investment in a taxable account that’s down.
• Sell it and realize a loss for tax purposes.
• Immediately buy something similar (but not “too similar”), so your actual market exposure stays roughly the same.

On paper, you’ve locked in a loss.
In real life, you’re still invested.

Why bother?

Because those realized losses can:

• Offset capital gains (now or in the future).
• Offset a limited amount of ordinary income each year.
• Be carried forward if you have more losses than gains.

You’re taking a bad moment (being down) and turning it into a tool that softens your tax bill over time.

Important distinction I see people miss:

This is very different from “I sold, I panicked, now I’m sitting in cash.”

Done correctly, tax-loss harvesting is more like switching seats on the same train than getting off the train entirely.

The case for “Just Waiting It Out”

Before we talk about when tax-loss harvesting wins, it’s worth acknowledging why “wait it out” became the default advice in the first place.

For long-term investors in diversified, broad-market funds, history has a clear pattern:

• Markets fall. Sometimes hard.
• People panic and sell at exactly the wrong time.
• Markets eventually recover. Sometimes faster than anyone expects.

“Don’t touch it” is, in many ways, protection against our own worst impulses. It keeps you from turning a temporary downturn into a permanent loss.

In my experience, “wait it out” often wins when:

• You’re invested in broad, diversified funds (not a handful of single stocks).
• The money is in tax-advantaged accounts (401(k), IRA, Roth, HSA) where realized losses don’t help you for tax purposes.
• You know you tend to react emotionally, and making changes would likely tempt you into more tinkering.
• The cost of making a change (fees, spreads, complexity, time) outweighs the tax benefit.

If your entire strategy is:

“I buy broad, low-cost funds in my 401(k) and let them ride for 20–30 years,”

then yes, layering in constant tweaks for the sake of it may do more harm than good.

When tax-loss harvesting quietly wins

Now the other side: the situations where using losses proactively can be a real advantage, especially for higher-income households.

Tax-loss harvesting tends to shine when three things are true:

1. You’re in a higher tax bracket.
2. You have or expect capital gains (from RSUs, ESPP sales, stock options, business or real estate moves, rebalancing, etc.).
3. The losses are in taxable brokerage accounts, not retirement accounts.

I often describe it as “future tax cushioning.”

If you’re a high-income tech professional or founder, your income and gains don’t arrive in a neat straight line. You get:

• RSUs vesting quarterly
• ESPP shares you eventually sell
• Occasional large gains from options, tender offers, or stock you’ve held for years

When you harvest a loss in a down market, you’re effectively creating a “bank” of losses that can:

• Soften the impact when those big gains show up
• Give you more breathing room to trim concentrated positions later
• Potentially reduce your overall tax bill across multiple years, not just this one

Done well, tax-loss harvesting doesn’t change your long-term investment strategy.
It just makes the tax ride a bit smoother.

“Harvest vs. Wait”: A simple way to think about it

Instead of treating tax-loss harvesting and “waiting it out” as rival camps, I find it more useful to ask a few grounding questions.

1. Where is this investment held?

401(k), IRA, Roth, HSA?
Losses don’t help you here. There’s no tax benefit to realizing them. As long as the underlying investment still makes sense, “wait it out” is usually the right move.

Taxable brokerage account?
Now tax-loss harvesting is on the table, especially if you have or expect capital gains.

2. What does this position represent?

Is this:

• A core holding in your long-term strategy (for example, a broad index fund)
  or
• A legacy or concentrated position (single stock, old allocation you’re no longer convinced about)?

If it’s a core holding, tax-loss harvesting might look like:

• Selling Fund A (down)
• Immediately buying Fund B that’s similar but not identical
• Staying invested while locking in a loss for tax purposes

If it’s a legacy or concentrated stock, harvesting a loss can be a way to:

• Gradually reduce risk
• Move away from a position you wouldn’t buy fresh today
• Do it in a way that’s less painful from a tax perspective over time

3. What’s your actual tax reality?

Some questions I walk through with clients:

• Are you consistently in higher tax brackets, with equity flowing into your life each year?
• Do you already have realized gains this year, or planned sales next year?
• Have you built up loss carryforwards from prior years?

For high earners with complex equity, the tax side isn’t a side note. It’s a major character in the story. In those cases, ignoring losses isn’t “staying simple.” It can quietly mean leaving money on the table.

Common fears (and what’s real)

We see a few recurring worries around tax-loss harvesting.

“Aren’t I locking in a loss forever?”

You are locking in the tax recognition of the loss. The key is what you do next.

If you:

• Sell at a loss
• Sit in cash for months
• Miss the recovery

then yes, you’ve locked in the loss economically as well.

But if you:

• Sell at a loss
• Immediately reinvest in a similar diversified fund
• Stay in the market

You’ve kept your market exposure while turning a painful moment into a tax asset.

“What about wash-sale rules?”

This is a real concern and something you can’t ignore.

If you sell a security at a loss and buy the same or “substantially identical” security within the wash-sale window, the IRS disallows the immediate loss.

So you need a playbook of substitutes:

• A different ETF tracking a similar (but not identical) index
• A slightly broader or narrower index
• A paired fund that provides similar exposure without crossing that “substantially identical” line

It’s a nuance that matters, and it’s one of the main reasons people lean on a planner or a system designed with these rules in mind.

When “waiting it out” truly wins

Even in taxable accounts, there are plenty of times when doing nothing is the better move. For example:

• The losses are tiny and don’t justify the friction.
• Trading costs, spreads, or operational complexity are higher than the tax benefit.
• You know that once you start, you’re likely to tinker nonstop, and that behavior risk is real.
• You’re currently in a lower tax bracket, with few gains to offset.

In those situations, the simplicity of “stay the course” can absolutely beat cleverness.

The goal is not to harvest every dip.
It’s to be intentional when the numbers and your situation justify it.

A practical way to combine both

For a lot of clients, the most effective path is not “I’m in the tax-loss camp” or “I’m in the wait-it-out camp.” It’s a blend, with structure.

Here’s the kind of framework that tends to work:

1. Write down your long-term investment plan. What are you investing in? What is your target allocation? How much risk do you actually want to take?
   ‍
   
2. Decide your rules for tax-loss harvesting in advance. For example:
   “We’ll review taxable accounts quarterly and harvest losses above $X, as long as we can stay invested in similar exposure.”
   ‍
   
3. Keep tax-loss harvesting away from your emotional throttle. It should feel like maintenance, not panic. More like rebalancing than reacting.
   ‍
   
4. Use a dashboard, not your memory. You want to see:
   
   • Positions
   • Cost basis
   • Unrealized gains and losses
   • Your overall tax picture
     
5. All in one place, so decisions are grounded in real numbers, not just gut feeling.

In other words:

• Let “waiting it out” be your default posture toward the market.
• Let tax-loss harvesting be a structured tool inside that posture, in the right accounts and the right years.

The bottom line

“Just wait it out” and “harvest every loss” are both incomplete as one-line philosophies.

The real question isn’t:

“Which side am I on?”

It’s:

“Given my income, my tax situation, and where this money sits,
when does waiting win, and when does harvesting quietly stack the odds in my favor?”

For many high-income, equity-heavy households, the answer often looks like this:

• Wait it out on trying to time the market.
• Be deliberate, not reactive, about using losses as a tax tool when it truly helps you.

This isn’t about being clever for the sake of it.
It’s about not leaving easy, legal advantages on the table when your financial life is already complex enough.

PS: If this is interesting, you will find our upcoming webinar on tax-efficient energy investments relevant. Use code ALPHAREFER for a complimentary access.

Important note: This is educational, not personal tax advice. Everyone’s situation is different, especially when you layer in equity compensation, state moves, or international complications. Running the numbers with a planner or tax professional who understands your full picture is usually worth far more than the cost of the conversation.