Loss harvesting strategies tax efficiently diversify concentrated stock

Slava Malkin (), Harrison Selwitz (), Taotao Cai () and Lisa R. Goldberg ()
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Slava Malkin: BlackRock, Inc.
Harrison Selwitz: BlackRock, Inc.
Taotao Cai: BlackRock, Inc.
Lisa R. Goldberg: BlackRock, Inc.

Journal of Asset Management, 2025, vol. 26, issue 5, No 1, 447-463

Abstract: Abstract We analyze strategies that seek to tax efficiently transform a concentrated position to a diversified equity portfolio by running back-tests on hypothetical portfolios. The average 200/100 long/short diversification strategy tax neutrally reduced the active weight of a concentrated position to 5% or less in 10 years in all 380 historical scenarios we examined. This reduction was achieved with an average hypothetical after-tax active return of 1.34% per year, net of transaction costs, financing costs and management fees, relative to the option of holding the concentrated position. An investor who prefers to retain some exposure to a concentrated position may opt for lower leverage or a long-only strategy that relies on an annual gains budget. We map the empirically observed characteristics of diversification strategies to investors’ preferences, enabling asset managers and advisors to customize appropriately.

Keywords: Downside risk; Loss harvesting; Speed of diversification; Tax efficiency; Leverage; Gains budget; Tracking error (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1057/s41260-025-00411-5

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