Impact of Market Conditions on Tax-Loss Harvesting: The Role of Portfolio Breadth in Industry-Based Strategies

Abstract

How much portfolio breadth does tax-loss harvesting require? Using cap-weighted Fama–French industry portfolios (10, 17, and 30 industries) from January 1995 through December 2025, together with four wash-sale-compliant substitute tiers per industry, we simulate gross tax-loss capture (TLC), measured as realized losses relative to initial account value. We find that volatility is the primary driver of harvesting opportunities, whereas the correlation structure of returns influences the effectiveness of breadth. High-volatility regimes generate substantially greater TLC than calm regimes across all breadth levels. The relationship between breadth and TLC is strongly concave: Expanding from a single-market portfolio to 10 industries increases TLC by 2.09 percentage points (pp), whereas expanding from 10 to 30 industries adds only 0.64 pp. Regime conditioning further highlights the interaction between volatility and correlation. The breadth benefit is largest in Differentiated Stress (high volatility, low correlation), where the increase from one portfolio to 10 industries is 3.60 pp versus 1.76 pp in Coordinated Stress (high volatility, high correlation) because lower correlations preserve effective diversification across industries. Expanding from 10 to 30 industries adds only 1.17 pp and 0.55 pp, respectively. Overall, 10 industries capture most of the simulated TLC gain available from expanding to 30 industries, with the incremental benefit of additional breadth being modest and highly regime-dependent.