By Karen Hube
Stock market volatility can be grueling on your nerves, but it can also create opportunities to eke out some tax savings.
As major U.S. stock indexes buckle and stutter, many advisors are turning their attention to moves that can help shave back tax bills for 2026 or in future years.
"In this kind of environment, disciplined tax planning often plays just as important a role as investment selection when it comes to preserving long-term wealth," says Evan Paul, founder of Paul Advisory and Legal Group.
Start with the basics: rebalance
Even after recent stock declines, many investors are likely to have bloated stockholdings after years of stock market expansion.
Rebalancing to a target allocation can feel painful. It means selling shares that have increased in value, potentially triggering a tax bill on realized gains.
A market dip is a prime opportunity to shave back overgrown allocations at a lower tax cost.
"Investors need to think of volatility as a friend," says Thomas Lee, co-president and CIO at Parametric. "Rebalancing helps prevent portfolios from becoming too concentrated, keeps risk aligned with the target and allows investors to benefit from the natural reversion of an asset class."
Reap some losses
If you are holding losing investments, put them to good use.
You can sell them and use realized losses to offset taxes on realized gains.
Long-term losses can offset long-term gains, which are investments held for more than 12 months.
"Because the market has run up so much in recent years it may not be easy to find investments down in value from their purchase price," says Gretchen Hollstein, a wealth advisor and director in wealth management at Aspiriant. "You may more likely have losses in shares you purchased more recently."
Short-term losses -- which are on investments you have held for one year or less -- can offset short-term gains first and any excess can offset long-term gains. But they are more valuable as offsets to short-term gains because short-term gains are taxed at the same rates as ordinary income as high as 37%. Long-term gains are taxed at capital-gains rates up to 20%.
If losses exceed gains, you can offset up to $3,000 of taxable income or carry them forward to future years.
If you like your losing investment, beware the wash-sale rule: You cannot repurchase the same or substantially identical investment within 30 days before or after selling if you want to use the losses to offset gains.
"We've been adding defensive equity positions, meaning they're focused on dividend growth or weighted by fundamentals rather than capitalizations," Hollstein says. "When we sell one to bank the capital loss, we don't want to lose that exposure, so we purchase another similar defensive-type position."
Consider a tax optimized account
To amp up tax-loss harvesting, consider a tax-optimized separately managed account.
These accounts often simulate holdings of a stock index, and managers aim to improve after-tax returns by actively trimming losses and gains to reduce taxable gains.
A more volatile market means more opportunities to improve tax outcomes, says Ran Leshem, head of Aperio. "Through roughly the first 2 1/2 months of the year, we've captured over $1 billion in realized losses for clients, a level above last year."
An analysis by JP Morgan of tax-optimization strategies across different investment styles over five-year periods from 2003 to 2019 found after-tax returns to be one to 1.2 percentage points higher than index returns.
Make your annual gifts
This year, annual gift tax exclusion rules allow you to make a $19,000 gift to as many recipients as you want without triggering the gift tax or eating into your $15 million estate tax exemption.
If you are married with three kids, for example, you and your spouse can gift a combined $38,000 to each, for total tax-free gifts of $114,000.
If you give stock that has declined in value in recent weeks, you can gift more shares than you would have when the share prices were at their peak, says Edward Renn, of counsel on the private client and tax team at Withers. "Focus on giving stock you expect to appreciate."
Convert IRA assets to a Roth
A market dip is prime time for converting some assets in your regular individual retirement account to a Roth IRA.
You must pay income taxes on the amount you convert. "Converting while values are down allows you to pay less tax, or get more shares into a Roth for the same conversion amount," Hollstein says.
Why bother? Regular IRAs have forced withdrawals beginning at age 73, and what you take out is taxed at income-tax rates up to 37%. In contrast, Roth IRAs have no required minimum distributions, and gains on converted assets can be taken out tax-free after a five-year holding period. For Roth and regular IRAs, you must be over age 59 1/2 to withdraw gains or face a 10% penalty.
Consider converting a portion of your IRA that won't push you into the next highest tax bracket, Hollstein says.
Given wild intraday market gyrations, to catch a market downswing you may have to act quickly -- but beware: Hasty moves can lead to costly errors, says Ed Slott, president of Ed Slott & Co.
"You have to be careful if you do it online," he says. "I know one guy who had a $2 million balance, pushed the wrong button and mistakenly converted the whole thing when he wanted to convert a portion. You can't undo it. Conversions are permanent."
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(END) Dow Jones Newswires
March 21, 2026 04:00 ET (08:00 GMT)
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