How Wealthfront’s Tax-Loss Harvesting Performed in 2024

At Wealthfront, our focus on optimizing your after-tax returns is one of the key factors that sets us apart from other robo-advisors. We estimate our clients have saved about $1 billion in taxes over the last decade. 

We’ve written before that tax-loss harvesting is arguably the most valuable service a robo-advisor can provide, and we’ve built what we believe is the best on the market. But you don’t have to take our word for it that Wealthfront’s Tax-Loss Harvesting is valuable—the proof is in the numbers. Tax-Loss Harvesting, which is available to all Wealthfront clients with taxable Automated Investing Accounts, has generated significant potential savings for clients through 2024:

• Clients have saved an estimated $1 billion in taxes: Last year alone, our software harvested over $145 million in losses to help lower clients’ taxes (with $2.78 billion harvested in the last five years and $3.48 billion harvested in the last ten years). Based on our clients’ current self-reported income, state of residence, and tax-filing status, we infer a combined federal and state tax rate for each client. We then multiply each client’s rate by their harvested losses, which adds up to a total estimated tax benefit of $49.83 million in 2024. Using the same methodology, we estimate Wealthfront has generated total estimated tax benefit of $1.09 billion for our clients over the last 10 years.

• We estimate nearly 96% of clients have had their fees totally covered by Tax-Loss Harvesting: When we use each client’s inferred tax rate to estimate their benefit from Tax-Loss Harvesting and compare that benefit to the actual amount they paid in advisory fees, the result is that for nearly 96% of participating clients who have used Tax-Loss Harvesting for at least a year, the estimated tax benefit exceeds fees paid. On average, clients’ tax benefit has been 7.6x our 0.25% annual advisory fee over the life of the account.

In this post, we’ll go over the basics of tax-loss harvesting and look more closely at how Wealthfront’s Tax-Loss Harvesting performed through the end of 2024.

What is tax-loss harvesting?

Tax-loss harvesting is a tax-deferral and tax-minimization strategy that involves selling investments that have declined below their purchase price and replacing them with similar investments. When you do this, your portfolio retains the same overall risk and return characteristics, but you get to “harvest” a loss that you can use at tax time. When you file your tax return, harvested losses can be used to offset capital gains and, if you have any left over, up to $3,000 of ordinary income for the year. If you still have losses left over after that, you can roll them over the future years.

How does tax-loss harvesting save you money?

As we mentioned above, tax-loss harvesting can save you money in two ways:

1. Tax minimization: Tax-loss harvesting is a tax-minimization strategy because it offers you the opportunity to benefit from tax-rate arbitrage. This is another way of saying you can potentially lower the tax rate you eventually pay when you sell your investments. How does this work? Tax-loss harvesting can allow you to offset short-term capital gains (which are typically taxed as ordinary income, currently up to 37% at the federal level) today and pay long-term capital gains rates (which currently top out at 20% at the federal level) when you eventually sell your investments in the future, provided you hold them  for at least a year. Keep in mind that your ability to do this depends on your future tax rates and when you decide to sell your investments.
2. Tax deferral: Tax-loss harvesting can also help you delay owing (and thus paying) taxes. This is valuable because of the time value of money. Put simply, money you save by not paying taxes today can be invested, meaning it has the potential to be worth more in the future when you do eventually pay taxes. You should know there’s some risk that your tax rate will go up in that time, however, and in that situation, your eventual tax cost could exceed the benefit you received from reinvestment.

Wealthfront’s 2024 Tax-Loss Harvesting results

We measure the benefit of our Tax-Loss Harvesting using “harvesting yield.” Harvesting yield is calculated by taking the daily amount of harvested losses and dividing it by daily AUM (assets under management). Then we calculate the average of those values over time and multiply it by the total number of trading days in a year to get annualized harvesting yield. A rule of thumb: When harvesting yield is high, that means our software found and took advantage of more opportunities to harvest losses.

The table below shows the dollar-weighted annual harvesting yield for clients with a Classic portfolio (our most popular portfolio) with a risk score of 8 (the risk score most commonly chosen by clients using Tax-Loss Harvesting) sorted by the year they first started using Tax-Loss Harvesting (or “client vintage”). 

Average annual harvesting yield for Classic portfolios with a risk score of 8 through 2024

Source: Wealthfront

Wealthfront’s software also harvested significant losses in client portfolios with other risk scores, too. The dollar-weighted average annual harvesting yield for clients using Tax-Loss Harvesting in a Classic portfolio across all vintages and risk scores is 4.23% over the last decade (4.07% over the last five years, and 0.57% over the last year). 

Tax-Loss Harvesting results in Socially Responsible portfolios

Wealthfront launched our Socially Responsible portfolio in late 2021, and it has had similar Tax-Loss Harvesting results to our Classic portfolio. 

• The dollar-weighted average annual harvesting yield for all Socially Responsible portfolios across all risk scores and client vintages in 2024 was 1.28% (vs 1.27% for our Classic portfolio).
• The dollar-weighted average annual harvesting yield for all Socially Responsible portfolios across risk scores and client vintages since their inception in late 2021 was 6.16% (vs 5.82% for our Classic portfolio over the same period).

Tax-Loss Harvesting results in customized portfolios

If you had a customized portfolio at Wealthfront in 2024, you also had an opportunity to benefit from our Tax-Loss Harvesting.

• The dollar-weighted average annual harvesting yield for all customized portfolios at Wealthfront across all client vintages in 2024 was 1.48%.
• The dollar-weighted average annual harvesting yield for all customized portfolios at Wealthfront across client vintages since inception in mid 2021 was 5.94%.

How much benefit will you get from Tax-Loss Harvesting?

Your situation is unique, so the actual benefit you personally receive from Tax-Loss Harvesting will likely be higher or lower than the average figures presented in this post. Some factors that affect the benefit you’ll receive from Tax-Loss Harvesting are:

• The risk level of your portfolio: Riskier portfolios are generally more volatile, and more volatility usually means you get more opportunities to harvest losses.
• Deposit timing: If you make one deposit and never make additional deposits, it gets harder to harvest losses over time. This is because if the market trends up over time, your cost basis will be comparatively low, meaning you need a relatively large market drawdown to get an opportunity to harvest losses. Frequent add-on deposits, however, mean you’ll have more tax lots in your portfolio and it’s more likely our software will be able to harvest losses.
• Your marginal tax rate: The higher your marginal tax rate, the more you’ll save when you use harvested losses to offset taxable gains.
• Your ability to use losses: You might not realize enough capital gains each year to use all of your harvested losses. That’s OK—you can roll unused losses over to future years.
• Wash sales: Occasionally, some benefit from Tax-Loss Harvesting can be lost to wash sales. Wash sales are relatively rare at Wealthfront (they affect less than 0.01% of the average daily dollars traded, excluding withdrawals) because our software is designed to avoid them across all of your Automated Investing Accounts with us. When a wash sale does occur, it’s not a big problem—you just have to wait a year to realize the loss associated with that transaction.
• Suitable alternates: Some investments offered at Wealthfront aren’t eligible for Tax-Loss Harvesting because we don’t have suitable alternate ETFs available for them. Choosing investments without suitable alternates can lower your harvesting yield.

A new way to save on taxes: Wealthfront S&P 500 Direct

In December of 2024, we launched Wealthfront’s S&P 500 Direct, which offers similar performance to an S&P 500® ETF, plus valuable tax savings—all for a 0.09% management fee. This is the same as the expense ratio of  SPDR S&P 500 ETF Trust (SPY), one of the most popular S&P 500® ETFs. S&P 500 Direct works by holding many of the individual stocks that make up the S&P 500® index, and then applying our Tax-Loss Harvesting to help turn losses into future tax savings.

Because this product is so new, we have very limited performance data, but we believe S&P 500 Direct could offer significant value in excess of what an investor could get from just owning an S&P 500® ETF or index fund. For more information, we suggest reading our S&P 500 Direct white paper for analysis related to our US Direct Indexing product, which uses the same Tax-Loss Harvesting software and methodology. We look forward to sharing Tax-Loss Harvesting results from S&P 500 Direct in the future. 

Optimize your taxes with Wealthfront

We consistently publish the results of our Tax-Loss Harvesting so you can get a clear picture of the benefit it offers. As far as we know, we are the only robo-advisor to do this. And you shouldn’t necessarily assume other tax-loss harvesting services will offer the same benefit as ours—not all tax-loss harvesting software is the same, and we’ve built what we believe is the best available. We are proud to offer it to you at no additional cost.