Tax-efficient Investing in Practice: Strategies Every High-Net-Worth Investor Should Know

by Scott P. Dolson

April 2026

For individual investors, taxes are often one of the largest—but most overlooked—factors affecting long-term portfolio performance. While investment decisions tend to focus on returns, risk, and diversification, the way those returns are taxed can materially influence what investors ultimately keep in their wallets. By implementing a tax strategy throughout the year, investors can potentially improve after-tax outcomes without changing their overall investment goals. Thoughtful tax planning is not about chasing loopholes, it is about structuring your financial life in a way that keeps more of what you earn working for you.

Three areas that deserve particular attention are tax-loss harvesting, the tax efficiency of exchange-traded funds (ETFs), and the type of income distributions generated by funds.

The Value of Active Tax-Loss Harvesting: Turning Volatility into Opportunity

Tax-loss harvesting is the practice of selling an investment that has declined in value to realize a capital loss. That loss can then be used to offset realized capital gains elsewhere in a portfolio, reducing the investor’s tax liability. If losses exceed gains, they may often be carried forward to potentially offset portfolio gains in the future.

While many investors think about tax-loss harvesting only near year-end, opportunities can arise at any point during the year as markets fluctuate. By monitoring portfolios regularly, investors may be able to capture losses during temporary market declines while maintaining market exposure. Investors should be mindful of the wash-sale rule prior to reinvesting sale proceeds. Violating the wash sale rule disallows the loss harvested and occurs when buying the same or a “substantially identical” investment within 30 days before or after selling it for a loss. Active tax loss harvesting allows investors to stay invested while still benefiting from the realized loss. Over time, systematically harvesting losses can create a pool of tax assets that help offset future gains.

Why ETFs Are Often More Tax Efficient

Another key tax consideration involves the investment vehicle itself. Exchange-traded funds are generally considered more tax efficient than traditional mutual funds, largely because of their structure. Given the role of ETFs across markets, the liquidity they provide, and how they trade throughout the day, their distributions to fund shareholders are typically less than mutual funds; sometimes significantly less so. For taxable investors, this difference can be meaningful. Even if an investor has not sold their shares, a mutual fund may distribute capital gains generated by portfolio trading, creating an unexpected tax bill. ETFs, by contrast, often minimize these distributions, allowing investors more control over when taxes are realized (i.e. capital gains versus fund distributions).

Why the Type of Distribution Matters

Not all fund distributions are taxed the same way, which makes it important for investors to understand the composition of income generated by their holdings.

Funds may distribute several types of income, including qualified dividends, non-qualified (ordinary) dividends, short-term capital gains, and long-term capital gains. Qualified dividends and long-term capital gains are generally taxed at lower federal rates than ordinary income. In contrast, non-qualified dividends and short-term gains are typically taxed at an investor’s marginal income tax rate.

For this reason, two funds with identical total returns may produce very different after-tax outcomes depending on the type of income distributed. Tax-aware investors often review distribution history and portfolio turnover when evaluating funds because the type of distribution matters when it comes to maximizing after-tax returns.

Bringing It All Together

Tax management should be an ongoing component of portfolio management rather than a once-a-year exercise. By harvesting losses throughout the year, favoring tax-efficient investment vehicles such as ETFs, and understanding the nature of fund distributions, investors can take a more proactive approach to managing after-tax returns. Over long investment horizons, even small improvements in tax efficiency can compound into meaningful gains in wealth.

If you’d like to discuss your portfolio strategy or long-term goals with an experienced advisor, please reach out for an introductory discussion.

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