Rebalance in a Downturn Without Capital Gains Taxes

What pros wish you knew about rebalancing in a slump

So, here’s the thing: rebalancing in a slump isn’t about being clever or trying to “time it.” It’s about risk control first, performance second. When markets chop around like they have this year, a plain-vanilla 60/40 can quietly morph into something you didn’t sign up for. After a 10% equity drop and a modest 2% bond lift, a 60/40 can drift to roughly 56/44. That doesn’t sound huge, but over time that drift stacks risk in places you didn’t intend. You know how a garage sale table ends up with a waffle iron next to old ski boots? Same vibe, lopsided, and not on purpose.

Why reset during a downturn? Because down markets are actually the cleanest time to move the pieces. Losses and new cash give you room to maneuver. And the tax bill everyone fears? It’s a cost you can usually control. Actually, wait, let me clarify that: you can’t erase taxes, but you can route around the landmines if you use the right channels.

Quick reality checks
– The IRS allows realized capital losses to offset capital gains dollar-for-dollar, and then up to $3,000 of ordinary income per year if losses exceed gains (current rule in 2025). Unused losses carry forward indefinitely.
– The wash-sale rule is 30 days before/after you sell a security for a loss, buying a “substantially identical” holding in that window disallows the loss. Swap to a similar-but-not-identical ETF for a month and you’re fine.
– Rebalancing inside tax-advantaged accounts (401(k), traditional/ROTH IRAs, HSAs) doesn’t trigger capital gains, period.

Look, taxes are a drag, but they’re not a reason to freeze. The problem I see this year is investors staring at headlines instead of their target mix and tolerance. Headlines shout. Targets whisper. If your plan says 60/40 and you’re sitting 54/46 after a rough patch, the job is to nudge back, methodically. Not tomorrow at 9:31am, not all at once, just with a steady hand. This actually reminds me of a client in 2011 who wanted to “wait for clarity.” We waited. Clarity never showed up; prices just moved.

Can you rebalance-without-capital-gains-tax-during-downturn? Often yes, or close to it. Here’s how you’ll hear pros frame it, sorry for the jargon in advance: use “tax lot harvesting.” Actually, plain English: pick specific tax lots with losses to sell, bank those losses, and use the proceeds to buy the underweight piece of your portfolio. Or do the heavy lifting inside IRAs/401(k)s where gains aren’t taxable. New contributions and dividends? Point them at what’s underweight for a few months. No taxable sales needed.

Okay, I’m a little too excited about this part because it’s simple math that saves real money. The goal in this section is to set the stage: we’ll show you practical ways to reset risk during a downturn, keep capital gains minimal, and avoid unforced errors like wash sales. Keep your eyes on your target mix and your tolerance, not the day-to-day noise. If you do that, the performance tends to take care of itself over time, Vanguard’s 2010 research on rebalancing showed it mainly reduces volatility while keeping return differences small, which is exactly the point.

• Risk control first: Rebalance to your plan, not to headlines.
• Downturns help: Losses, new cash, and tax-advantaged accounts give you room to reset.
• Taxes are manageable: Use loss offsets (up to $3,000 against ordinary income each year) and do the rest in IRAs/401(k)s.
• Mind the rules: 30-day wash-sale window; use similar, not identical, replacements.

Start where taxes don’t apply: 401(k), IRA, Roth, and HSA moves

Look, the easiest win right now is to rebalance where trades aren’t taxable. It sounds obvious, but I still see people sell in taxable first and then wonder why their April bill is bigger than expected. Inside your 401(k), traditional IRA, Roth IRA, and HSA, you can rebalance freely, no capital gains triggered. That matters because long-term capital gains in 2025 are taxed at 0%, 15%, or 20% federally depending on income, and high earners can also get hit with the 3.8% Net Investment Income Tax. Why pay any of that if you don’t have to?

So, do the heavy lifting in tax-advantaged first. If stocks ran and you’re 10 points over target on equities, sell equities in the IRA or 401(k) and buy bonds there. Same mechanics if bonds rallied. You reset risk without creating a taxable event. In a year where rates are still elevated relative to pre-2022 and markets are choppy, you want that flexibility. Actually, let me rephrase that: you need it.

Use the plan features you’re already paying for

• Auto-rebalance: Most 401(k)s have it. Set quarterly or annual. It’s not fancy, it’s just disciplined.
• Target-date funds: One-and-done for a lot of folks. They rebalance under the hood. If you’re mixing them with other funds, watch for overlap, twice the bonds by accident isn’t a great surprise.
• Brokerage window: If your plan lineup is limited, the self-directed window can give you the precision to fix drift with low-cost ETFs.

Asset location is half the battle

Here’s the thing: what you own where is just as important as what you own at all. Put the tax-inefficient stuff in tax-advantaged. That usually means bonds and REITs (REIT payouts are mostly taxed as ordinary income in taxable accounts). Keep broad equity index funds in taxable to maximize qualified dividends and long-term gains treatment later. Quick context: ordinary income rates can reach 37% federally in 2025, while qualified dividends/long-term gains top out at 20% (plus that possible 3.8% NIIT). Minimizing future friction is the name of the game.

HSAs count too

HSAs are triple-tax-advantaged when used for qualified medical expenses. If yours is invested, you can rebalance there with zero capital gains tax. I occassionally meet folks who let the HSA sit in cash for years; if you’ve got a big deductible coming up, fine, but otherwise treat it like the long term account it is. I was guilty of that once, set it and forgot it, until I realized it drifted 20% off target.

Charitable giving? Use your IRA after age 70½

If you’re 70½ or older, you can make Qualified Charitable Distributions (QCDs) directly from an IRA to a charity. The amount you send doesn’t show up as taxable income and, once you hit Required Minimum Distributions (RMDs), age 73 under current law, the QCD can count toward that RMD. It’s a clean way to give without raising AGI, which can help with Medicare IRMAA brackets and other phase-outs. I was going to walk through an example with numbers, but the gist is simple: giving from the IRA often beats writing a check from taxable.

Anyway, fix the drift inside your 401(k)/IRA/Roth/HSA first. Then, and only then, look at the taxable account, harvest losses, match gains, think about lot selection, all that. If you get the order right, you control risk without needless taxes.. but that’s just my take on it.

New cash is your cleanest lever (plus dividends and interest)

Look, when markets are down, every fresh dollar you put in is basically a get-out-of-taxes card for rebalancing. You’re not selling anything, so there’s no capital gain to trigger. Just steer all new contributions straight into the underweight sleeve until your targets are back in line. Sounds obvious, but honestly, I wasn’t sure about this either early in my career, I used to “split the difference” and it took forever to fix drift.

How do you do it in practice? Simple: if your plan is 60/40 and the equity sleeve fell to 55% after a drawdown, point every new dollar, payroll contributions, employer match, HSA deferrals, toward equities until you’re back near 60%. No need to be perfect to the decimal. Get close, then resume normal allocations. And yes, this works across 401(k), IRA, Roth, and HSA. It’s boring, but it works.

On dividends and interest, turn off auto-reinvestment in the stuff that’s overweight. I know, DRIP, Dividend ReInvestment Plan, sounds convenient. It is. But if large-cap growth is already heavy in your portfolio, why keep automatically buying more of it with every dividend? Redirect that cash to the laggards instead. That’s rebalancing without selling anything. When I say “turn off DRIP,” that’s the jargon. What I really mean is: let the dividends/interest land as cash, then manually point them to what’s cheap in your lineup.

• Point all new contributions into the underweight assets until targets are restored.
• Turn off DRIP in overweight positions; reallocate those cash flows to the laggards.
• Use employer matches and HSA payroll deferrals as silent rebalancers.
• Re-check monthly or quarterly; you don’t need daily tinkering.

Here’s the thing, this actually reminds me of 2009. After the 2008 collapse (the S&P 500 total return was about -37% in 2008), steady buyers in early 2009 didn’t need to sell a thing to get back in balance. New money and dividends did the heavy lifting as the market rebounded (+26.5% total return in 2009). Same dynamic showed up again during the 2020 COVID shock: from the Feb-Mar 2020 peak-to-trough, the S&P 500 fell roughly 34%, and buyers who kept funneling cash to the underweights recovered their targets faster than the folks who froze and waited. I’m still figuring this out myself in some corners, timing feels tempting, but the math of steady cash wins most of the time.

What about taxes in taxable accounts? New cash and redirected dividends are the cleanest way to rebalance without capital gains during a downturn. If you already have loss carryforwards from prior tax-loss harvesting, say, from 2022 when the S&P 500 total return was about -18.1%, even better, but you don’t need them. New contributions and income distributions can do the work quietly. Do you need to be precise? No. Do you need to be consistent? Yes.

A quick example: suppose your 401(k) is $400k and drifted to 65/35 from a 60/40 target because bonds held up and stocks slipped. If you and your employer combined are putting in $30k this year, aim that $30k entirely to equities until you’re back to 60/40. If dividends in taxable are $8k a year and your growth fund is overweight, stop its DRIP and redirect that $8k to your underweight international or small-cap index. You’ll correct the tilt without realizing gains. Not perfect, but close enough.

Actual results come from habits, not heroics. New cash, re-aimed dividends, periodic checks. That’s it. And yes, occassionally you’ll overshoot, just nudge back next quarter.

Anyway, during choppy stretches, like we’ve had off and on this year, new cash is your cleanest lever. You won’t always feel brilliant doing it in the moment. But, you know, boring often pays the bills.

Harvest losses, stay invested: the like‑but‑not‑identical swap

So, here’s the play during a drawdown: realize losses in your taxable account, then immediately buy something similar enough that your market exposure stays intact, but not so similar that you trip the wash‑sale rule. Under U.S. rules, capital losses can offset current or future capital gains and up to $3,000 of ordinary income per year (per IRS Pub. 550, a number that’s been the same for years), with unused losses carrying forward indefinitely. That carryforward part is underrated, small harvests add up over time, especially after a few choppy quarters like we’ve had this year.

The wash‑sale rule is the gotcha. If you sell at a loss and buy a “substantially identical” security within 30 days before or after the sale, the loss is disallowed right now, technically it’s added to the basis of the replacement shares and your holding period tacks on. Translation: you didn’t lose the tax benefit forever, you just deferred it and made your tracking messier, and honestly, that bookkeeping headache alone is reason to avoid it. Also, the rule only applies to losses, not gains, so if you sell a position at a gain and buy it back, no wash sale, just taxes you’ll owe. Speaking of which, this applies across all your accounts (even IRAs), not just the one where you sold.

How to keep exposure without breaking the rule

• Avoid the exact same index for 30 days. If you sell an S&P 500 ETF that tracks the S&P 500 Index, don’t buy another S&P 500 ETF from a different issuer; that’s too close. Swap to a different but highly correlated index. Examples: S&P 500 → CRSP U.S. Large Cap or Russell 1000; Total U.S. Market (CRSP) → Russell 3000; MSCI EAFE → FTSE Developed ex‑US. They’re not identical, but day‑to‑day risk is similar enough that you won’t feel naked for a month.
• Match factor/sector exposure, not the label. If you’re harvesting in a quality or value fund, move to a different index family with comparable factor tilts, or pair funds to approximate exposure. I might be oversimplifying, but for a U.S. total market sale, holding S&P 500 plus an “extended market” fund for 30 days can get you close.
• Use specific‑lot identification. Tell your broker you want “Specific ID” as your cost basis method. Then when you sell, pick the highest‑cost lots to realize the biggest losses while preserving your lowest‑basis, long term winners. It’s boring admin, but it’s the difference between a so‑so harvest and a great one.
• Mind the calendar. The 30‑day window is both directions, 30 days before and after the sale. Auto‑invest and DRIPs can quietly create a violation. If you sold Fund A, make sure you didn’t automatically buy Fund A last week in an IRA by accident. I’ve seen that movie.

Concrete swaps I actually like (not perfect, but close enough):

• Vanguard Total Stock Market (CRSP) → iShares Russell 3000; or swap into a pair like S&P 500 + Completion Index.
• S&P 500 market‑cap ETF → CRSP U.S. Large Cap or MSCI USA; for a slightly different tilt, equal‑weight S&P (not identical) can be fine for 30 days.
• MSCI ACWI ex‑US → FTSE All‑World ex‑US; Developed‑only → switch between MSCI and FTSE versions.
• Sector funds: use different index families (e.g., MSCI vs. S&P GICS versions) to avoid “substantially identical.”

Why this matters right now: earlier this year we had several 3-5% pullbacks around rate‑path headlines and earnings, nothing apocalyptic, but enough dispersion under the surface that individual funds have meaningful red ink. Those little dips are harvest fuel. You can realize, say, a $10,000 loss today, bank the tax asset, and stay invested immediately in a near‑twin. If your marginal ordinary income rate is 32% and you use the $3,000 ordinary income offset this year, that’s about $960 in current‑year tax savings, with $7,000 of losses still carried forward for future gains. Not bad for something you can do in ten minutes if your cost basis lots are clean.

Direct indexing can turbocharge this. Instead of one fund, you own the underlying stocks and harvest at the position level. Volatile stretches create dozens of small losses you can harvest without changing your overall exposure. It’s more work (or a fee if you use a provider), but the loss “inventory” can be much larger. Honestly, I wasn’t sure about this either when it first got trendy, but after seeing multi‑year results across clients, especially in 2022 and again during the fits and starts last year, the cumulative losses harvested can be multiples of a simple ETF approach. The trade‑off is complexity; you need to watch wash‑sale interactions if you also hold overlapping ETFs elsewhere.

Look, the trick isn’t being perfect, it’s staying invested while you ring the tax register. Harvest the loss, buy something very similar but not identical, set a 31‑day reminder, and if you want, switch back later. That’s it.

Anyway, keep the spirit of the rule: don’t sell and rebuy the exact same thing. Keep your risk where you want it, keep your paperwork clean, and let the carryforwards quietly do their job. And yes, you might overshoot an exposure for a month, just nudge back when the window closes and you’ll be fine, you’ll be totally fine, really.

Trim without gains: specific lots, gifting, and charitable moves

So, when you’ve got an overweight winner and you actually need to cut it back, you don’t have to torch your tax return to do it. There are a few unsexy, but very effective, tools that keep realized gains low or at zero. This is the stuff that saves real money over years, not days. Honestly, I wasn’t sure about this either a decade ago, but I’ve watched it work across plenty of households. The key is paperwork precision and timing.

Start with specific-lot ID. If your broker lets you choose specific lots, always pick high-basis shares first. That way, your realized gain stays tiny even if the position has run. Switch your cost-basis method in the account to “specific identification” and pre-designate lots when you place the trade. Actually, wait, let me clarify that: make sure you get written trade confirms that reference the exact tax lots; don’t rely on a phone note. Most custodians support this, but it’s on you to click the right box. Selling a 2019 lot bought at $85 beats selling a 2015 lot bought at $30, same shares, wildly different tax hit.

Donate appreciated shares held >1 year. If you give appreciated securities (held more than 12 months) to a public charity or a donor-advised fund (DAF), you avoid the capital gain entirely and you may claim a charitable deduction at fair market value, subject to IRS limits. Under current rules, gifts of long-term appreciated property to public charities are generally deductible up to 30% of AGI (check IRS Pub 526 for the specifics). You keep your cash, the charity gets the full pre-tax value, and you remove the position from your balance sheet without selling. In practice, pairing a DAF contribution with a rebalance is clean: transfer the shares in-kind, then use the DAF to “bunch” several years of gifts. I’ve seen clients move, say, $50k in a single year to cross the standard deduction threshold and then skip the next year or two; same giving, better tax math.

Family gifting can shift tax burdens. If you gift shares to a family member, remember the recipient generally takes your cost basis (carryover basis). That can be great if they’re in a lower bracket and can sell at a 0% long-term capital gains rate, but it can backfire if they’re also high-income. Plan it. Also watch the kiddie tax rules for minors; capital gains can be pulled into the parents’ bracket in some cases. And yes, I’m repeating myself here: basis follows the gift.

Pair gains with harvested losses. If you must realize some gains to rebalance, harvest losses elsewhere in the portfolio in the same tax year. Netting rules are your friend: short-term against short-term, long-term against long-term, then you net the remainders. If you still end up with a net capital loss, up to $3,000 can offset ordinary income each year, with the rest carried forward indefinitely under current law. Earlier this year and last year were sneaky good times for this because many rate-sensitive assets had drawdowns while AI-heavy names ripped; the mix created natural offsets.

Time for long-term rates when possible. Waiting until positions hit the one-year mark turns a short-term gain (taxed at ordinary rates) into a long-term gain. Long-term federal rates are 0%, 15%, or 20% depending on taxable income, plus the 3.8% NIIT for high earners. Per current IRS rules, that 0% bracket exists, which is why timing and income management matter. I’ve had years where a client strategically realized gains in December after a bonus estimate changed the bracket math by, no joke, around 7% when you include state.

Quick checklist to rebalance without lighting up your 1099:

• Use specific-lot ID and pick the highest basis first.
• Donate long-term appreciated shares to a DAF/charity to wipe the gain and potentially deduct FMV (subject to the 30% of AGI rule for appreciated property).
• Consider family gifts if a lower-bracket recipient can sell at 0%, but remember carryover basis.
• Harvest losses elsewhere in the portfolio during the same tax year to net gains.
• Wait for the 12-month mark to qualify for long-term rates when the risk/reward of waiting is acceptable.

Here’s the thing: rebalancing during a downturn or a choppy tape, like parts of 2022 or a few weeks earlier this year, often creates the best tax angles. Trim the winners with specific lots, shift appreciated positions to a DAF, and use red ink where the market gave it to you. Boring, but it works.

Anyway, keep your eye on the calendar, keep your basis records clean, and coordinate with your CPA. The mechanics aren’t flashy, but they quietly compound after-tax returns over time. And yes, sometimes doing nothing for a few weeks to hit long-term status is the smartest “move” you can make.

Advanced plays: asset location shifts, ETF mechanics, and derivatives

So, for bigger portfolios, or advisors steering the whole household, there are ways to rebalance risk without ringing the tax bell. Not for everyone, and you probably don’t need all of these. But they’re on the menu in 2025, and when you use them carefully, they work.

• Use asset location actively. Change risk where the IRS can’t see the trades. If you want your family’s stock/bond mix to drop from 75/25 to, say, 65/35, sell equities and buy bonds inside the traditional IRA or Roth. Leave the big taxable winners alone. You still get the household risk shift, but you avoid realizing gains in the brokerage account. I do this a lot: model the target allocation at the household level, then push the trades into the tax-deferred sleeves first.
• Favor tax‑efficient ETFs in taxable. The in‑kind creation/redemption process (supported by IRC §852(b)(6), on the books for decades) tends to purge embedded gains before they hit investors, which reduces capital gain distributions. That’s why ETFs are the default in taxable for many of us. Quick reality check: equity ETFs still pay dividends you’ll owe tax on, but capital gain distributions are rare compared with mutual funds. The mechanism is dull plumbing, but it’s the kind of dull that saves money.
• Equity index futures to adjust beta temporarily. If you’re sitting on appreciated positions you don’t want to sell, S&P 500 futures can dial exposure up or down for a few weeks without touching basis. Jargon alert: “beta” just means market exposure. Futures are efficient: the E‑mini S&P 500 contract is $50 times the index, and the Micro E‑mini is $5 times. If the S&P 500 is around 5,500, that’s roughly $275k of notional per E‑mini and ~$27.5k per Micro. Be mindful of margin, daily P&L swings, roll costs when contracts expire, and basis risk if your holdings don’t track the index closely. Also tax note: Section 1256’s 60/40 rule applies to regulated futures contracts, 60% long-term, 40% short-term treatment regardless of holding period. Helpful in high brackets.
• Protect concentrated positions with options. Collars (long put, short call) or covered calls can cut downside while you wait for a better tax window to sell. Watch the details: equity options are generally taxed as short-term when closed; broad-based index options can fall under 1256 (again, that 60/40 blend). Options also have real-world frictions, vol changes, early assignment, and, yes, the occasional fat-finger. I’ve been there.
• Municipal bond sleeves for ballast in taxable. If you need to add safety without realizing gains elsewhere, a muni sleeve can carry the defensive load in the brokerage account while you rebalance risk in IRAs. The tax-equivalent yield math often works for top brackets, and credit stats are solid: Moody’s long-run (1970-2023) investment‑grade muni 10‑year cumulative default rate is about 0.10%, compared with ~2.2% for global investment‑grade corporates over the same horizon. That’s why munis tend to be the go-to ballast in taxable.

Look, none of this is magic. It’s just picking where trades happen. Earlier this year when markets chopped around after a hot January, we used futures to trim beta for a quarter, then unwound into strength and cleaned up inside IRAs. No headlines, less tax drag. I’m still figuring this out myself For “how much futures vs. how much cash,” but the principle is steady: move exposure without moving basis when you can.

Two more notes from the trenches. First, ETFs: pay attention to fund structure and history of distributions, most broad equity ETFs rarely issue capital gains, but some niche or older strategies might. Second, derivatives: margin is a feature and a risk. Financing rates matter in 2025 with cash yielding meaningfully; carry can flip the calculus on longer hedges. And if your benchmark is not the S&P 500, say you’re heavy in a factor ETF, basis risk gets real, fast. Actually, let me rephrase that: your hedge can zig while your portfolio zags.

Anyway, if the goal is to rebalance without capital gains in a sketchy tape, this toolkit helps: shift inside tax‑advantaged accounts, prefer ETF wrappers in taxable, use futures for temporary exposure tweaks, and wrap single‑stock risk with options. Coordinate all of it with your CPA and, frankly, your sleep schedule. The best strategy is the one you’ll actually stick with during the next squall.

Your 30‑minute downturn checklist (and a small challenge)

Look, you don’t need to pay a tax toll every time you nudge the portfolio. The trick in a messy tape is moving the chess pieces where the IRS can’t see the move, or at least where the tax bill rounds to near-zero. Markets are jumpy this month, and they may stay jumpy, but the rules don’t change.

1. Rebalance inside tax‑advantaged first. Hit your 401(k), IRA, Roth, and HSA before you touch taxable. If your HSA is invested, it’s a stealth rebalancing slot, “triple tax advantaged” still applies in 2025. For reference, the 2025 HSA contribution limits are $4,300 self-only and $8,550 family (IRS, 2025), plus a $1,000 catch‑up if you’re 55+. I repeat: inside these accounts, trades don’t create a current tax bill.
2. Direct new cash to what’s underweight for 3-6 months. Paycheck contributions, dividends, interest, RSUs vesting, steer all of it toward the laggards until your weights are back on target. Does this feel slow? Yes. Is it clean? Also yes. Honestly, this alone fixes half of rebalancing drift without selling a thing.
3. Harvest losses, swap into not‑identical replacements, and track the wash‑sale clock. The wash‑sale window is 30 days before/after your sale (U.S. rule), so don’t rebuy the same or “substantially identical” security. Swap S&P 500 ETF A for ETF B with a different index family, or a total‑market fund for a large‑cap fund + mid‑cap sleeve. In 2023, over 90% of U.S. equity ETF assets had zero capital‑gains distributions, which is why these are my usual loss‑harvest vehicles in taxable. I’m still figuring this out myself with a couple of niche funds that do throw off gains, read the distribution history.
4. Use specific‑lot ID and pair gains smartly. Turn on specific‑lot identification at your broker. Realized capital losses offset capital gains dollar‑for‑dollar and then up to $3,000 of ordinary income per year (IRS Pub 550; carryforwards are indefinite). Short‑term gains hit at ordinary rates, which top out at 37% in 2025; long‑term gains sit at 0%, 15%, or 20% depending on income. Translation: if you must crystalize gains, pair them with your loss carryforwards or harvest fresh losses first. This is boring, but boring works.
5. Consider gifting appreciated shares if you’re giving this year. Give shares you’ve held >1 year to charity or to a donor‑advised fund (DAF). You avoid the capital gain and, if you itemize, you can generally deduct fair market value (subject to AGI limits, typically 30% for gifts of long‑term appreciated securities to public charities). Why sell and pay tax if you were going to give anyway? Why sell and pay tax if you were going to give anyway? Exactly.

Quick mantra: rebalance in shelters, point new money at underweights, harvest losses, pair gains, gift appreciated, stop tinkering.

Two small guardrails from, you know, scar tissue. First, set a wash‑sale calendar reminder for 31 days out. Second, keep a simple lot‑tracking sheet, ticker, purchase date, cost, notes. It takes around 7% more effort (kidding, but it feels like it) and saves you real dollars.

Challenge for the week: review your target mix and pick one concrete, tax‑aware action you will execute before month‑end, no procrastination. Examples: redirect all dividends to underweights for the next quarter; harvest $5-10k of losses and swap to an alternate ETF; move your rebalance inside the Roth; transfer appreciated shares to a DAF if you’re making gifts this year. Markets are noisy, but your plan doesn’t need to be.

Frequently Asked Questions

Q: How do I rebalance during a slump without triggering a tax hit right now?

A: Use three levers: 1) Do the trades inside your 401(k)/IRA/HSA, no capital gains there. 2) In taxable, harvest losses first, then sell winners only up to the losses. 3) Aim new contributions and dividends at the underweight side. Slow, methodical, no hero moves.

Q: What’s the difference between rebalancing in my taxable account versus my IRA/401(k)?

A: In IRAs/401(k)s/HSAs, trades don’t create capital gains, period. So that’s your cleanest channel for big shifts. In taxable, every sale can realize a gain or loss. The smart sequence in taxable during a downturn is: harvest losses (to offset gains dollar-for-dollar, then up to $3,000 of ordinary income in 2025; carry the rest forward), use those losses to “fund” trimming overweight winners, and be lot-specific, sell high-basis shares first. Watch the wash-sale rule: a loss is disallowed if you buy a substantially identical security 30 days before/after, even across accounts. So if you sell an S&P 500 ETF in taxable for a loss, don’t auto-buy the same one in your IRA. Swap to a similar-but-not-identical fund for 31+ days. Net-net: use tax-advantaged accounts for heavy lifting; use taxable with tax-loss harvesting and careful substitutions.

Q: Is it better to wait for markets to calm down or just rebalance gradually?

A: Look, waiting for “calm” is like waiting for the subway when it’s raining, sure, it’ll show up eventually, but you’ll be soaked by then. Your job isn’t to predict; it’s to keep risk where you intended. Use rules: 1) Bands, rebalance when an asset class drifts 5 percentage points or 20% of its target (e.g., 60% stocks → act at 54% or 66%). 2) Schedule, quarterly check-ins, with smaller, opportunistic nudges when bands trip. 3) Use flows, direct new contributions/dividends to what’s underweight first. In 2025’s chop, gradual is usually better: fewer taxes, lower trading slippage, less regret. If you’re nervous, split the trade into thirds over a month or two. And do the bigger trades inside tax-advantaged accounts. Targets whisper, headlines shout, listen to the targets.

Q: Should I worry about the wash-sale rule when I’m tax-loss harvesting while rebalancing? How do I do it correctly?

A: Yes, because one accidental repurchase can nuke the deductible loss. The rule: if you sell at a loss, you can’t buy a “substantially identical” security 30 days before or after the sale across any of your accounts, including IRAs. Practical playbook: 1) Substitute, don’t sit in cash. Example: sell VTI (total U.S. market) for a loss and buy SCHB or ITOT for 31+ days. Want S&P 500? Sell IVV and buy VOO or, better, swap to a total-market fund to avoid “substantially identical” risk. 2) Sector/Factor swaps: sell XLK, buy FTEC; sell IWM (small-cap), buy SCHA. 3) Turn off dividend reinvestment for 31 days to avoid accidental repurchases. 4) Don’t rebuy the original fund in your IRA during the window, yes, that can trigger a wash sale on the taxable loss. 5) Use losses to offset realized gains dollar-for-dollar, then up to $3,000 of ordinary income in 2025; excess carries forward. Example: realize $8k losses, trim $6k gains tax-free, apply $3k against income this year, carry $-1k to next year. Anyway, harvest the loss, hold the substitute for 31+ days, then switch back if you still want the original exposure.

@article{rebalance-in-a-downturn-without-capital-gains-taxes,
    title   = {Rebalance in a Downturn Without Capital Gains Taxes},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/rebalance-without-capital-gains/}
}