Effectively transitioning an investment portfolio from a set of existing legacy investments to its target exposure, while considering the tax implications for clients, is essential for financial advisors to help clients keep more of what they earn. While portfolio transitions on J.P. Morgan’s Tax-Smart SMA Platform can be a “set it and forget it” exercise for advisors and clients, regularly assessing an account’s transition progress can be useful when a client’s circumstances change or if markets evolve in unexpected ways.

This FAQ guide will explain why updating tax budgets is important, what it involves and the benefits it offers.

How do tax-smart transitions work?

In a tax-smart transition, a client is seeking to migrate from an existing portfolio to a new portfolio and new strategy, while controlling the amount of taxes that are owed throughout the transition process. To achieve this objective, year-round tax-loss harvesting helps a client offset some or all of the gains associated with selling legacy positions with losses realized through tax-loss harvesting. This allows the client to control the amount of taxes incurred in their transition and turn market volatility into an advantage rather than a threat to their savings. Depending on unrealized gains associated with the client’s legacy holdings, their willingness to pay taxes through the transition process and the market environment, a tax-efficient transition can take weeks, months, quarters or years.

The good news is that tax-managed portfolio transitions are now significantly easier to achieve. J.P. Morgan’s intelligent tax technology can help advisors optimize the potential tax consequences when transitioning a client’s portfolio. By providing a spectrum of options, our intelligent tax technology helps investors make informed decisions about taxes and market risks that consider their personal preferences. Most importantly, investors also benefit from an efficient transition process that may deliver significant tax savings.

What is a tax liability budget?

A tax liability budget represents the amount of taxes that a client may be willing to incur from trading activities during an account’s transition. When investments are bought and sold to bring an account closer to the target portfolio, these trades can create a taxable event if gains are higher than losses. The tax liability budget is a planned allowance for these potential taxes.

Some advisors may select a “minimum” tax liability budget that can be as low as $0, where they request that J.P. Morgan only take gains associated with selling legacy positions when these gains can be fully offset by losses harvested elsewhere within the account. Other clients may select a higher tax liability budget, allowing J.P. Morgan to sell a greater amount of legacy positions to move an account’s transition along at a faster pace.

Why can it be important to regularly review and update tax liability budgets?

For portfolios on the Tax-Smart Platform, transitioning from legacy holdings to the target portfolio, J.P. Morgan resets the tax budget to $0 once the previous budget is realized or “spent.” After this, the account operates on a “tax-neutral basis,” targeting realized gains only when there are realized losses to offset them with the hope of limiting the total tax bill associated with an account’s transition to the budget that had been set initially.

For example, if a client selects a tax liability budget of $5,000, in its next opportunity to trade the account, J.P. Morgan would conduct a series of buys and sells to increase the alignment of the client’s account to the target portfolio while seeking to ensure that the taxes owed as a result of these trades are no greater than $5,000. From thereafter, unless instructed otherwise, J.P. Morgan will seek to run the account on a “tax-neutral basis” and incur $0 of new tax liability, so that the overall journey may be limited to the initial $5,000 tax liability.

Maintaining a low tax liability budget can limit immediate tax bills, which might seem beneficial in the short term. However, it can also limit the progression of the transition process, especially for older accounts with significant legacy positions. Increasing a tax budget, on the other hand, can help accelerate an account’s transition, aligning the portfolio more closely with the desired investment strategy and reducing tracking error or the risk that a portfolio’s performance deviates from its benchmark.

Regularly reviewing and updating your clients’ tax liability budgets, especially at the start of the year, can help ensure that the transition process aligns with their financial goals and tax sensitivities.

A proactive review can be particularly important if:

• Your client is concerned about their account’s tracking error.
• Your client is interested in a faster transition to the target portfolio.
• Client circumstances may have changed, enabling increased funding or tax budgets.

Reaching out today could allow you to position portfolios for more effective tax-loss harvesting throughout 2026.

How can increasing the tax liability budget impact an account?

Consider an account with a tracking error over 5% and a certain percentage of transition completed. By increasing a tax liability budget and allowing for net gains to be realized by setting a new tax budget amount, the tracking error could be reduced, and the transition percentage could increase (potentially significantly). This can be achieved by selling out of legacy positions that are not aligned with the target portfolio. and reallocating proceeds from the sale to new positions, while targeting net gains in line with the tax budget allocated when taking a client’s tax rates into account. This adjustment not only enhances the portfolio’s alignment with the target portfolio but also optimizes the overall investment strategy.

How has tax-loss harvesting worked in previous years?

Even in rising markets, JPMorgan Tax-Smart Direct Index SMAs can deliver value through tax-loss harvesting. In 2025, a cash-funded account opened at the beginning of the year tax-loss harvested 14 times (including five times in April alone), accumulating approximately $84,000 in realized losses per $1 million invested. Even in the first quarter of 2026, accounts have taken advantage of volatility intra-month and at the individual stock level.

Managing and transitioning legacy positions for long-term success

Utilizing advanced technology and strategic planning, advisors can manage and transition legacy positions in taxable accounts while minimizing risk. This approach not only supports informed decision-making but also adds significant value for clients, ensuring their portfolios are optimized for long-term success.

In conclusion, reviewing tax budgets is a crucial step in managing tax-smart portfolio transitions. By understanding and implementing these strategies, financial advisors can effectively navigate the complexities of transitioning portfolios, ultimately enhancing client satisfaction and achieving their financial objectives.