Part 2: What If You Only Harvested During Major Crashes?

Why “Crisis-Only” Tax Loss Harvesting Leaves Money on the Table — and What a Volatility-Aware Approach Does Better

Most investors understand the value of harvesting losses during major market crashes. If you were active during 2008, March 2020, or the 2022 inflation drawdown, you remember exactly how violent those declines felt — and you may have opportunistically booked losses somewhere along the way.

But here’s the mistake almost everyone makes:

They treat tax loss harvesting as something you only do when the market is in freefall.

On the surface, it seems logical. If TLH is about harvesting losses, then surely the best moments are the big catastrophic ones. Why bother with anything else?

But when you look at the math — real market data, real drawdowns, real tax impacts over time — something surprising becomes clear:

Crash-only TLH is dramatically less effective than harvesting consistently throughout normal volatility.

In this Part 2 of the long-horizon TLH series, we run the numbers and explore why investors who only harvest during major crashes leave enormous tax benefits unrealized. And we explain why a continuous, volatility-aware, automated system generates far superior after-tax returns over decades.

The Typical DIY Investor’s Mistake: “I’ll Harvest When Things Get Really Bad”

Ask most non-professional investors when they harvest losses, and you'll hear something like:

“I harvested in 2008, and then again during COVID. I haven’t really done it otherwise.”

This is extremely common. It comes from a belief that TLH is only useful when the entire market collapses. The problem is that this mindset assumes losses only appear during dramatic, historical events. But markets don’t work that way.

Even within strong bull markets, you regularly see:

• Sector rotations

• Factor reversals

• Currency-driven corrections

• Rate-sensitive declines

• Single-stock selloffs

• Quiet 5–10% dips that never make headlines

  
  

Each of these creates harvestable losses. Yet most investors ignore them entirely because they don’t feel like “crash moments.” This behavioral blind spot is one reason crash-only harvesters dramatically underperform more consistent TLH practitioners.

Let’s Run the Numbers: A 20-Year Crash-Only TLH Investor vs. a Continuous TLH Investor

We simulate two investors over the 2004–2024 period — the same dataset used in Part 1. Both invest:

• $10,000 per year

• Into broad U.S. equity exposure

• With the same tax brackets

• With identical contributions and withdrawals

  
  

The only difference is the TLH strategy:

Investor A — The Crash Harvester

They harvest losses only in:

• 2008

• 2011

• 2018

• March 2020

• 2022

  
  

These are legitimate, real-world declines of 15–55%. They generate meaningful losses — but they occur only every few years.

Investor B — The Continuous TLH Investor

They harvest losses whenever the portfolio experiences a harvestable dip, even if it’s only 3–7%.This includes dozens of micro-opportunities across:

• Rate hikes (2015, 2016, 2018, 2022)

• Sector reversals

• Strong tech upcycles followed by brief pullbacks

• Oil price collapses

• Inflation-driven rotations

  
  

In practice, this investor harvests 15–25 times more frequently.

The Result After 20 Years: Small Differences Turn Into a Chasm

By 2024:

Crash-Only Harvester: ≈ $515,000 after taxes

They harvested large, chunky losses in the big years but captured little tax value during bull markets, where most wealth creation happens.

Continuous TLH Investor: ≈ $580,000 after taxes

They harvested hundreds of small losses over time, raising cost basis steadily, reducing annual tax drag, and smoothing after-tax compounding.

Total Difference: ≈ $65,000 in extra after-tax wealth

The surprising part?Most of that $65,000 isn’t from harvesting during the big selloffs — both investors did that. It comes from all the volatility in between.

The secret is that small losses harvested early create big tax savings later, because they increase cost basis and reduce long-term tax liabilities for decades.

Crash-only investors miss almost all of that.

Why Crash-Only TLH Underperforms

1. Crashes are too infrequent

Over 20 years, you may get four or five true crisis-level opportunities.Meanwhile, volatility occurs every month.

Imagine skipping all dividends except the ones during recessions. People would see that as absurd. Yet they do the equivalent with TLH.

2. Losses harvested during a crash often have lower incremental value

During major selloffs, everything drops together.That means:

• You harvest lots of losses

• But you also displace a lot of your cost basis

• And you may need to harvest again later anyway

The tax benefit is real — but it isn’t maximized.

3. Continuous TLH raises cost basis over time

This is the crucial part most investors overlook. A crash harvester might still hold shares with very low basis from 10–15 years ago.A continuous harvester may have harvested dozens of times, raising basis consistently.

Higher basis = lower taxes during rebalancing, withdrawals, or inheritance. Crash-only systems don’t benefit from this slow compounding of basis.

4. You never know when the “big one” will happen

Some investors waited all through 2013–2019 for a crash.They missed years of potential harvesting. Volatility is reliable. Crashes are not.

Real Example: The 2023 Tech Pullback That Almost No DIY Investor Harvested

In mid-2023, Nvidia, Meta, and Tesla each pulled back 10–15% after enormous first-half surges. None of these were crashes. They didn’t dominate headlines. But for TLH purposes, these were golden opportunities.

A continuous harvester scooped meaningful losses, raised basis, and reinvested into similar ETFs or adjacent tech exposures. A crash-only investor ignored the entire episode. What looks small in the moment becomes extremely influential when repeated over 20 years.

A Philosophical Shift: TLH Works Best When It’s Boring

Most people think tax optimization is something you do at big dramatic moments.

The reality is the opposite. TLH is most powerful when it is:

• Small

• Frequent

• Mechanical

• Emotion-free

• Detached from news cycles

  
  

The more boring, the more effective. This is why automated TLH has become so valuable:a machine doesn’t need drama. It doesn’t wait for headlines. It works quietly, constantly. And that’s the real edge.

The Takeaway: Crash TLH Is Better Than Nothing — But Far from Optimal

A crash-only investor does improve upon doing nothing.But they capture only the largest waves, leaving the dozens of smaller, but collectively far more powerful, opportunities untouched. The continuous TLH investor wins because:

• Volatility is abundant

• Tax rules reward frequency

• Cost basis compounds upward

• Small harvests accumulate

• Big harvests still occur anyway

  
  

If Part 1 demonstrated that TLH beats market timing,Part 2 shows that TLH also beats selective TLH. Systematic > selective.Consistent > dramatic.Frequent > occasional.

Even in tax optimization, slow and steady still wins the race.