2025 is a year ripe for volatility: closely-watched macro data, like employment and inflation, continue to surprise; policy changes from Washington seem inevitable but unpredictable; and interest rate expectations oscillate, as the market seeks to understand how the Federal Reserve will respond to changing conditions.

Traditionally, this volatility has been thought of negatively. Poor stock performance naturally damages overall portfolio returns and increases the likelihood that an investor will realize those losses and move into cash. However, volatility doesn’t have to be feared. In fact, for savvy investors willing to embrace active tax management, it might actually be welcomed.

Historically, tax management in portfolios aimed to reduce an individual’s tax burden by realizing losses in assets that have performed poorly within a calendar year and deducting those losses from income. The process was typically reserved for year-end.

Today, a more modern approach to tax management has emerged, providing tax-conscious investors with increased flexibility and more opportunities to generate alpha: in any period of market stress, regardless of timing, investors can capitalize on negative performance by realizing a loss in a position, deducting that loss from that year’s tax bill and reinvesting the proceeds into a security, or basket of securities, with similar characteristics. In other words, market volatility can be transformed into tax savings without the need to deviate from long-term allocation goals or transition into cash.

Recent market performance has warranted a closer look at this strategy: despite closing up 23% in 2024, 133 companies within the S&P 500 closed the year down 5% or more, with 356 companies experiencing a 5% pull-back at some point during the year. So far, 2025 has proven to be an equally fertile ground for harvesting “tax alpha”: 159 names have sold off by 5% or more through early February.

Looking forward, tax management will likely play an increasingly important role in portfolio construction. Volatility has become an integral part of contemporary markets, thanks to increased market efficiency, greater access to data and the empowerment of retail money through online brokerage platforms. In addition, stretched U.S. equity valuations make markets more susceptible to shocks. As a result, potential policy surprises – like those surrounding immigration, trade or the regulatory regime – will be felt much more acutely, and changes to rate expectations will reverberate more powerfully through markets.

Ultimately, investors should recognize that a volatile future presents an unorthodox opportunity for alpha generation. As a result, an ongoing, systematic, technology-enabled approach to harvesting tax savings may result in an additional source of return. 

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