Introduction

Tax-loss harvesting (TLH) is one of the more compelling “tax-smart” features robo-advisors advertise. But like any strategy, its real value depends on how it’s implemented, who uses it, and the investor’s tax context.

In this article, we’ll cover:

• What tax-loss harvesting is and how robo-advisors do it

• The empirical evidence for its effectiveness

• Key constraints, costs, and risks

• Best practices and who stands to benefit most

• A positioning of Surmount’s approach

What Is Tax-Loss Harvesting?

Tax-loss harvesting involves selling securities that have declined in value to generate a capital loss, which can then offset realized capital gains and, in some cases, ordinary income (subject to limits) under U.S. tax law (The Tax Adviser).

Because of IRS rules like the wash-sale rule (which disallows a deduction if a “substantially identical” security is repurchased within 30 days), harvesters must replace sold securities with proxies or wait out the window (Investopedia).

Historically, tax-loss harvesting was a manual advisor task conducted at year-end. Modern robo-advisors, however, use automated systems to monitor portfolios continuously and execute harvesting opportunistically (Yale Economics).

Robo platforms can detect which tax lots are in loss, compute substitution trades to maintain exposure, and reallocate accordingly — while observing wash-sale rules and maintaining portfolio risk/return characteristics (Robo-Advisor Finder).

Evidence & Estimates: What’s the Real Benefit?

Estimated “Tax Alpha”

A study by Chaudhuri, Burnham, and Lo (cited by Kitces) found that a systematic monthly TLH strategy from 1926 to 2018 produced an average 1.08 % per year of tax alpha over a non-harvested baseline (Kitces).

That figure falls closer to 0.72 % for accounts without new contributions, since fewer loss opportunities emerge over time (Kitces).

Kitces also cautions that many robo platforms do not tailor harvesting to individual tax circumstances, which may lead to overstated generalized benefit (Kitces).

Real-World Usage & Platform Claims

• Wealthfront publishes results showing its TLH engine has delivered meaningful tax benefits to clients (Wealthfront).

• Its white paper asserts that tax-loss harvesting “typically more than pays for our advisory fee” (Wealthfront Research).

• The FDIC notes that TLH is a key feature offered by robo-advisors such as Wealthfront and Betterment (FDIC).

• Robo-Advisor Finder describes how platforms substitute into similar funds to maintain allocation (Robo-Advisor Finder).

• Investopedia factors TLH availability into its robo-advisor rankings (Investopedia).

Constraints, Costs & Risks

1. Dependency on Contributions & Flows

Portfolios without new contributions eventually run out of harvestable lots, reducing benefit (Kitces).

2. Future Tax Rate Uncertainty

Harvesting is a deferral; if your future tax rate is higher, savings can shrink or reverse (SmartAsset).

3. Wash-Sale and Replacement Risks

Poor handling of wash-sale rules or overly correlated replacements can disqualify deductions (Investopedia).

4. Transaction Costs & Spread

Frequent harvesting can create trading costs and slippage, reducing net gain (Wealthfront Research).

5. Platform Fees vs Harvesting Gains

High fees may eat up TLH benefits (Kitces).

6. Complexity & Overtrading Risk

Overactive harvesting may create unnecessary turnover and reporting complexity.

Who Benefits Most — and Who Less So

Best Candidates

• Investors in higher tax brackets

• Investors with taxable accounts (not IRAs/401(k)s)

• Those with regular contributions creating fresh tax lots

• Buy-and-hold investors who value automation

• Larger accounts where fees and costs are proportionally smaller

Less Ideal Candidates

• Investors in low tax brackets

• Investors using primarily tax-deferred or tax-free accounts

• Portfolios with little unrealized loss left

• Those who prefer simple taxes over added reporting

Best Practices & What to Ask in a Robo

1. How often is TLH run — daily, weekly, monthly?

2. Does it account for your tax bracket and projections?

3. How are replacements chosen (to avoid wash sales)?

4. What costs are assumed in harvesting?

5. Can it be toggled off?

6. How transparent are the realized harvests and reports?

7. Does it coordinate across accounts and tax lots?

Some advanced systems embed tax costs directly into optimization, balancing harvesting against risk and return (arXiv).

Surmount’s Approach

Surmount aims to deliver TLH in a transparent, disciplined, and adaptive way:

• Continuous scanning for harvest opportunities, not just year-end

• Smart replacements that preserve exposure while respecting wash-sale rules

• Consideration of net benefit — weighing tax deferral against fees and costs

• Options for users to set thresholds or opt out for simpler reporting

• Clear reporting of harvested lots and tax impact

• Positioning TLH as one tool among many, not a silver bullet

In short, Surmount integrates TLH as part of a holistic investing approach — designed to maximize real after-tax outcomes without overpromising.