The Capital Loss Bank: The power of flexibility in financial planning

Key Takeaways:

• Tax-loss harvesting can be used even without immediate gains by building losses that may be applied in the future.
• Tax-loss harvesting strategies may help offset gains when rebalancing portfolios or accessing cash from appreciated investments.
• Establishing a tax-loss harvesting strategy early may help investors navigate unexpected events over time.

“Why would I implement tax-loss harvesting if I don’t have any capital gains to offset?”

When exploring strategies that implement tax-loss harvesting, many investors focus on “what immediate capital losses can this offset today?” This is not a wrong approach but let me offer an alternative perspective: harvesting losses throughout one’s investment journey, even if they don’t have immediate capital gains to offset, may help create future optionality.

Tax-loss harvesting is the process of selling securities that have decreased in value, replacing them with a similar security, and harvesting the loss from the sale of the security that temporarily declined in value. By “realizing” this loss, it can now be used to help offset capital gains elsewhere, such as:

• Sale of real estate
• Sale of a business
• Portfolio rebalancing
• Sale of securities

If an investor does not have an immediate capital gain to offset, those realized losses can generally be carried forward into future years. These accumulated losses—referred to here as a “capital loss bank”—can be used strategically down the road as needed to offset capital gains.

Tax-loss harvesting is not only about current tax savings, but also about building flexibility in financial planning for unexpected events.

Because capital gains often appear unexpectedly. The following three scenarios illustrate when this may occur and how a capital loss bank may help manage the impact.

Imagine a scenario where an investor is approximately 10 years out from retirement, with no large expected purchases or capital gains events on the horizon. Then, a home they have long admired becomes available.

They may want to explore the opportunity to purchase it but face a challenge: their current home has appreciated significantly over the years—well above the $500,000 capital gains exclusion for married couples filing jointly on a primary residence. As a result, selling the home could generate a meaningful tax liability, prompting them to consult a financial advisor before making a final decision.

In this scenario, losses harvested through a direct indexing strategy may have accumulated over time in their capital loss bank. These losses could be used to help offset the capital gains amount above the exclusion amount upon the sale of the home.

This example illustrates how having a capital loss bank in place may provide additional flexibility when evaluating decisions that involve potentially taxable gains. 

Markets change, and many investors look for portfolios that evolve with them. To illustrate, consider a scenario in which a portfolio added a gold allocation during the inflationary environment of 2022. Since then, gold prices have increased by more than 150% from early 2022 through April 2026.* This position may now represent a larger portion of the portfolio, promoting a desire to reduce exposure. However, the position may also have significant unrealized gains.

In another portion of the portfolio —U.S. large cap equities—a direct indexing strategy with active tax-loss harvesting may be implemented. Over time, this may result in accumulated losses that could create an opportunity to trim appreciated positions, such as gold, while helping to manage the associated tax impact. In this way, investors may be able tap into the capital loss bank.

Tax considerations can be an important factor when re-balancing non-qualified accounts. Tax-loss harvesting strategies may provide additional flexibility by helping to manage the tax impact associated with portfolio adjustments. 

The following scenario illustrates a couple experiencing a liquidity event following the sale of a business they had operated for many years. After the sale, they invest the proceeds and maintain a relatively conservative spending approach.

Over time, as they become more comfortable with their financial position, many investors in similar situations begin to revisit personal goals or interests—whether that’s pursuing new hobbies or passions, such as collecting classic cars, acquiring artwork or exploring other personal pursuits. In this case, they may decide to move forward with a meaningful purchase. By the time they reach out to a financial advisor to raise cash from their portfolio, more than two years may have passed. During that period, equity markets may have appreciated significantly—for example, the S&P 500® Index increased by more than 45% from the beginning of 2024 through the end of 2025**—resulting in meaningful portfolio growth.

However, this appreciation may also introduce tax considerations when selling assets to generate cash. In this scenario, a tax-loss harvesting strategy may have been implemented across portions of the portfolio, resulting in accumulated capital losses stored up in the capital loss bank.

These losses could be used to help offset gains realized when selling appreciated securities, helping to manage the tax impact associated with accessing cash.

So, why implement tax-loss harvesting if there are no immediate capital gains to offset? Because optionality can be an important and often underappreciated component of financial planning.

When I played football in college, one of my coaches would write out this equation:

Unexpected events + prepared players = better outcomes

In financial planning, the equation could be adjusted to:

Unexpected events + prepared investors = more flexibility in navigating outcomes

You don’t want to build the capital loss bank only when you need it. You may benefit from building it in advance.

*Source: World Gold Council. LBMA Gold Price in 1Q2022 was $1,870/oz and has increased to $4,725/oz  as of April 24, 2026. Past performance is not indicative of future results.

**Source: S&P 500® Index total return for the period beginning January 1, 2024 through December 31, 2025. Past performance is not indicative of future results. Indexes are unmanaged and cannot be invested in directly.