Direct Indexing Tax-Loss Harvesting Calculator

Direct indexing — owning individual stocks in an SMA rather than a fund — lets your advisor harvest tax losses from individual positions continuously, even when the overall portfolio is up. For taxable accounts above $1M, the annual tax savings compound into a substantial wealth advantage. This calculator estimates that benefit for your situation.

How direct indexing tax-loss harvesting works

A traditional index fund (ETF or mutual fund) holds hundreds or thousands of stocks in a single wrapper. You can sell the fund at a loss, but you can't harvest losses on individual positions inside it — the fund does the harvesting on your behalf only when rebalancing.

A direct-indexing SMA holds those same positions individually in your name. When Amazon drops 15% while the S&P 500 is flat (because other positions were up), your advisor sells the Amazon lot and immediately buys a correlated replacement stock (e.g., a different mega-cap tech name). You book a loss you can use against gains elsewhere — capital gain distributions, concentrated-stock sales, bonus income taxed at capital-gains rates via trust structures.

What drives the TLH alpha rate?

• Portfolio volatility. More volatile individual stocks create more harvesting opportunities. A tech-heavy taxable account generates more TLH than a stable dividend portfolio.
• Account age. Fresh accounts (low embedded gains, many lots recently purchased) generate higher alpha in years 1-5. Older accounts with highly appreciated positions have fewer lots to harvest without triggering wash sales.
• Number of positions. A 500-stock SMA harvests more efficiently than a 200-stock one — more individual lots means more uncorrelated loss events.
• Your tax rate. The gross harvesting rate is the same regardless of your tax bracket, but the value of the loss is proportional to your rate. A 23.8% federal LTCG rate (20% + 3.8% NIIT) applies to most HNW investors; adding a 5-13% state rate pushes total benefit higher.
• Coordination with other losses/gains. TLH losses are most valuable when paired with large realized gains elsewhere — concentrated-stock sales, business exit proceeds, RSU vesting.

Who benefits most from direct indexing?

Direct indexing makes economic sense when:

• Taxable account ≥ $1M. Minimum account sizes at providers like Parametric, Aperio, Wealthfront SMA, and Frec range from $250K to $2M. Below $1M, the fee is hard to justify vs a simple ETF.
• Combined capital gains tax rate ≥ 25%. At 23.8% federal (20% LTCG + 3.8% NIIT) plus a 5%+ state rate, you're in the zone where TLH generates meaningful after-tax alpha.
• Active capital gains events. You have concentrated stock to unwind, RSUs vesting, or a business exit in progress — losses generated by TLH directly offset those gains in the same year.
• Long time horizon. TLH doesn't eliminate taxes, it defers them (via lower cost basis on replacement positions). The longer you hold, the more the deferral compounds in your favor.

Limitations and what direct indexing doesn't solve

• It's a deferral, not elimination. Replacement positions have lower basis → higher future gain when eventually sold. The calculator uses a "net alpha" figure that accounts for this. True elimination requires step-up in basis at death or charitable donation of appreciated positions.
• Wash-sale rules constrain replacement choice. IRC § 1091 bars repurchasing the "same or substantially identical" security within 30 days. Good implementation requires a universe of correlated-but-distinct replacements.
• Tracking error. An SMA replicating the S&P 500 with 200-300 stocks will not perfectly match the index. Providers keep tracking error low (typically <0.5% annualized) but it's not zero.
• Complexity. Thousands of individual tax lots require disciplined management. This is not a DIY strategy — it requires an advisor or platform built specifically for it.

2026 capital gains tax rates: what HNW investors pay

For 2026, the long-term capital gains rates are 0%, 15%, and 20%, per IRS Rev. Proc. 2025-32. The 20% rate applies to single filers above ~$533,400 and married-filing-jointly above $613,700.

On top of this, the Net Investment Income Tax (NIIT) — 3.8% under IRC § 1411 — applies to net investment income above $200,000 (single) or $250,000 (MFJ). These thresholds are not indexed for inflation, so they've been unchanged since 2013 despite significant bracket creep.

Effective federal LTCG rate for most HNW investors: 23.8%. Add your state rate for total exposure. California investors pay 13.3% on top → 37.1% combined. New York City investors pay ~11% state + city → ~34.8%.