Tax strategy as offense and defense in investing
September 18, 2025
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3 min
As the official NFL season kicks off, it’s a great time to remind investors that just like football, successful investing requires a well-rounded game plan. Whether you're calling plays from the sidelines or managing portfolios from the office, the principles of offense and defense apply, especially when it comes to taxes.
Playing both sides of the ball
Every football season brings change. Teams evolve through injuries, trades, and the draft. Coaching-staff turnover reshapes strategy, and rule changes – such as this year’s adjustment of the “dead ball spot,” which moves touchbacks to the 35-yard line – alter the dynamics of the game.
Investing is no different. Market conditions shift, tax laws evolve, as we just saw with the passage of the One Big Beautiful Bill (OBBB) Act, and investor goals change. But one thing remains constant: To win, you need a game plan for both sides of the ball.
Offense: Scoring with loss harvesting
Offense in tax-aware investing means proactively seeking opportunities to enhance after-tax returns. The most powerful tactic is tax loss harvesting, in which a stock is intentionally sold at a loss to offset a realized capital gain in the current tax year or in the future. This strategy reduces an investor’s taxable income dollar for dollar.
For investors to stay in the game, proceeds from harvested losses are typically reinvested in other securities to maintain market exposure. Just like a missed field goal can cost a game, a wash sale can result in a disallowed loss, so avoid repurchasing the same or substantially identical security within 30 days. Waiting five Sundays will do the trick.
Defense: Protecting gains
Defense is about managing gains wisely to avoid unnecessary tax hits. This might be done by deferring the realization of short-term gains until they are eligible for lower long-term capital gains rates. Or deferring the gains until the next calendar year when the taxpayer is in a lower bracket. Strategically harvesting portfolio gains is especially useful for married filers with taxable income under $96,700 (in 2025), as they can realize long-term capital gains at the 0% capital gains rate.
De-risking a highly appreciated position that the investor wants to continue to hold can be accomplished with options. Puts can be purchased to protect the downside. Or a collar strategy can be employed to limit a stock’s upside and downside.
Special teams: Watch out for ETF and mutual fund distributions
Mutual funds and exchange-traded funds (ETFs) must distribute their portfolio’s capital gains at least annually, typically in November and December. It might be wise to sidestep those taxable distributions if the position has an unrealized loss or if the investment has underperformed and is in imminent risk of being benched. Selling before the capital gains distribution can reduce tax drag.
But watch out for a penalty flag from the Internal Revenue Service (IRS) on wash sales and recharacterizing losses. The Tax Alpha Insider1 blog recently explained a little-known tax rule that applies to distributions of mutual funds, ETFs, and real estate investment trusts (REITs) held less than six months.
Ordinarily, if shares of a fund are sold at a loss after holding it for less than six months, it’s a short-term loss. However, if the fund distributed long-term capital gains on those shares during the holding period, the loss is recharacterized as a long-term to the extent of the capital gains distribution.
Instead of reducing highly taxed short-term gains, the character matching rules will first offset long-term capital gains, reducing the tax efficiency of the realized loss. This rule also applies to tax-exempt interest (i.e., municipal bond funds) where you can deduct only the amount of loss that is more than the exempt-interest dividends.2
End zone
As the clock winds down on the year, remember: The best teams don’t just run out the clock – they execute with precision until the final whistle. For investors, that could mean dialing in a direct indexing strategy with automated tax loss harvesting, layering on an options strategy to protect against volatility, launching a calculated Hail Mary into small- and mid-cap stocks, or tiptoeing down the sidelines to avoid capital gains distributions. Make sure your investment team keeps their eyes on the end zone by potentially maximizing after-tax returns with every play.
