(Bloomberg) — This year’s stock market turbulence has punished ordinary investors. But for the wealthy, it’s opened up fresh opportunities to convert equity swings into tax breaks — fueling a growing Wall Street business that turns volatility into a financial advantage.
Most Read from Bloomberg
BlackRock Inc., Goldman Sachs Group Inc. and Morgan Stanley are among firms scaling up a strategy known as tax-loss harvesting, typically offered through customized portfolios called separately managed accounts. When markets drop, managers sell stocks trading below their purchase price to realize losses. Those losses offset gains elsewhere in a portfolio, reducing clients’ tax liabilities while maintaining overall portfolio exposure.
The approach allows investors to shrink their current-year IRS bills while deferring capital gains into the future. In April’s selloff, for example, a manager could dump Home Depot Inc. and rotate into Lowe’s Cos Inc., maintaining sector exposure while staying inside tax rules.
Once a boutique service reserved only for the ultra-rich, investment firms are repackaging market turbulence as a fiscal opportunity, with automated trading programs scanning portfolios daily as equity conditions shift. With fee pressure eroding revenue in traditional asset management, Wall Street is leaning more heavily on tax-optimization trades to differentiate offerings, retain clients and defend margins in a competitive marketplace.
“There is just inherently going to be more volatility in the system,” said Scott Smith, senior director at industry consultant Cerulli Associates. “With trade policies, tariffs, taxes, everything is on the table. There is no assumption of what the future looks.”
In one particularly active stretch during April’s selloff, BlackRock’s Aperio, a platform for personalized portfolios, executed more than $18 billion in trades. That generated $700 million in realized losses that can be used to offset taxable gains elsewhere in client portfolios, or so-called tax-loss harvesting. That equated to roughly $5 to $7 in losses realized for every $100 traded that month.
“We monitor daily. We look at losses and high-cash positions. We balance harvesting with managing tracking error,” said Ran Leshem, who oversees BlackRock’s separately managed account business, now managing $220 billion. “Our goal is to be the market leader in SMAs.”
Still, even as this year’s selling frenzy created opportunities, the equity rebound that followed highlights a trade-off: while the approach can lower future tax bills, it also locks in losses that may prove costly if markets quickly recover, making the ultimate payoff difficult to measure in real time.
Regardless, the opportunities are only growing. Direct indexing, where investors hold individual stocks directly rather than through pooled funds, has become the backbone of this tax-optimization machine. With the SMA market expected to grow from $3 trillion to $5 trillion by 2027, firms are layering on increasingly complex techniques to compete, pitched as added-value services. Tax-loss harvesting is only one lever. Advisors also optimize dividend timing, gain deferrals, charitable gifting and jurisdictional overlays in an attempt to juice after-tax portfolio performance.
“Risk management and tax management go hand in hand,” said Monali Vora, global head of wealth investment solutions at Goldman Sachs Asset Management. “You can’t do one without the other.”
Aperio’s long-short tax-aware strategies, launched in 2023, amplify gross exposure — boosting the number of positions that can generate harvestable losses, while keeping market exposure roughly the same. About 7% of April’s realized losses came from these strategies. While still a small share of overall assets, it’s part of the firm’s expanding business.
Managing tracking error, or how closely a portfolio tracks its benchmark, remains a challenge. The IRS wash-sale rule bars investors from buying back the same, or substantially identical, securities over a specified timeframe. Firms navigate these constraints by swapping into correlated securities. Selling Moderna Inc. and buying Pfizer Inc. is straightforward; replacing a giant like Apple Inc. requires more complex substitutes.
“Clients are seeking alpha, downside protection and more tax-loss harvesting potential for both ETF and stock positions,” Leshem said. “But with that comes the tug of war between harvesting and maintaining tracking error.”
At Dimensional Fund Advisors LP, the approach is different. Instead of mirroring an index, the Texas-based firm uses broad diversification across thousands of stocks to reduce wash-sale risk, reallocating proceeds toward securities with higher expected returns based on their quant model.
“We can keep the profile of the account but take advantage of tax opportunity,” said Savina Rizova, co-chief investment officer and global head of research. Dimensional, which lowered its account minimum to $500,000 in 2021, harvested $20 million in net losses across about 1,400 accounts in April — averaging $16,700 in losses per $1 million invested.
Parametric, Morgan Stanley’s direct indexing arm, strikes a more cautious tone. “Tax-loss harvesting is one layer of customization, but there are many others,” said co-president and CIO Tom Lee. “For most institutions, tax management isn’t their focus.”
At the height of April’s volatility, Parametric harvested $620 million in losses, generating around $230 million in potential tax benefits. That same month, Parametric also introduced an offering with a $25,000 minimum investment, part of a broader push to open direct-indexing features to smaller accounts and widen the client base for tax-managed SMAs.
Quant hedge funds such as AQR Capital Management are also in tax-optimization arena, applying long-short structures aimed at maximizing harvestable losses while managing exposure drift.
As competition heats up, Goldman Sachs Asset Management is pushing into new customization features to expand its tax-optimized platform, such as introducing capabilities to migrate equity ETFs into SMA portfolios. The firm has also ramped up its engineering staff to scale automation and global execution as tax-optimized services become increasingly industrialized.
While tax-loss harvesting can reduce tax bills, research shows the biggest benefits tend to accrue to wealthier investors with large taxable portfolios and steady capital gains to offset.
As such, for investors able to access these platforms, the appeal is simple.
“There is an awareness among investors that it’s not what you make, it’s what you keep,” said Parametric’s Lee. “Taxes represent a headwind for investors to the extent they have to realize gains in taxable accounts. You can take advantage of volatility when it comes.”
–With assistance from Justina Lee and Lu Wang.
Most Read from Bloomberg Businessweek
©2025 Bloomberg L.P.
