Making the Most of a Down Market: Five Tax Moves Worth Considering

If the first article made the case for staying invested, this one is about doing something more than just holding on. A declining market is not only survivable — for the patient and prepared investor, but actually, it can also be one of the most tax-productive periods of your financial life.

1. Tax-Loss Harvesting

If you hold investments in a taxable account that are worth less today than what you paid for them, you can sell them, realize that loss on paper, and immediately reinvest in something similar. The loss can then be used to offset capital gains elsewhere in your portfolio — or, if your losses exceed your gains, up to $3,000 of ordinary income per year. Any remaining losses carry forward to future tax years.

2. Roth Conversions at a Discount

When stock values fall, your Traditional IRA holds the same number of shares — but those shares are worth less. That means you can convert a larger number of shares into a Roth IRA for the same tax cost or convert the same number of shares and pay less in taxes.

The logic is straightforward: you pay ordinary income tax on the amount converted today, and then all future growth in the Roth IRA is tax-free forever. When markets are down, you are essentially locking in a lower tax bill on assets that have a higher expected future value. When those shares recover — and historically, diversified portfolios always have — the recovery occurs inside the Roth, entirely sheltered from taxes.

This strategy works best if you are in a relatively low tax bracket this year, have cash outside your IRA to pay the resulting tax bill without touching the converted funds, and have enough time for the Roth to compound before you need the money. It is also worth noting that the current tax rates, which were extended and made permanent under the One Big Beautiful Bill Act passed last year, are historically low by any reasonable measure. That makes the case for accelerating income into today's brackets even more compelling.

3. Rebalancing in Taxable Accounts

When markets decline unevenly — which they almost always do — your portfolio drifts away from its target allocation. Stocks may now represent a smaller percentage of your portfolio than intended, while bonds or cash have grown relatively larger.

Rebalancing back to your target means buying more of what has gone down and trimming what has held up. In a normal market, the trimming side of that trade can create taxable gains that give investors pause. In a down market, that hesitation often disappears — either because the gains are smaller, or because harvested losses elsewhere in the portfolio can offset them. The result is that a down market frequently offers a cleaner, lower-cost opportunity to get your allocation back on track.

4. Selling Appreciated Positions You Have Been Holding for Tax Reasons

Most investors have at least one position they have held longer than they should have, simply because selling it would trigger a large capital gain. A down market can reduce the size of that unrealized gain — sometimes significantly — making the after-tax cost of finally moving on much more manageable.

If you have been holding a concentrated position, a legacy holding that no longer fits your plan, or a fund you would rather replace, now may be the time to act. Pair the sale with harvested losses from other positions, and the net tax impact can be surprisingly modest.

5. Reviewing Your Charitable Giving Strategy

If you make meaningful charitable contributions, a down market is a good time to revisit how you are giving. The most tax-efficient approach for most of our clients who are 70½ or older with a Traditional IRA is the Qualified Charitable Distribution, or QCD. A QCD allows you to transfer up to $108,000 directly from your IRA to a qualified charity, satisfying your Required Minimum Distribution if applicable, without the distribution ever appearing as income on your tax return.

This matters more than ever under the current tax code. The One Big Beautiful Bill Act introduced an additional 0.5% income floor on itemized charitable deductions beginning in 2026 — meaning that for taxpayers who itemize, a portion of their charitable giving no longer reduces their taxes at all. The QCD sidesteps this limitation entirely, because the money never counts as income in the first place.

For taxpayers under 70½, contributing appreciated securities directly to charity — rather than cash — remains one of the most effective giving strategies available. You avoid the capital gains tax on the appreciation and receive a deduction for the full fair market value of the shares. In a down market, this is less powerful than in a rising one, but it still beats writing a check.

None of these five strategies requires a market bottom, a prediction, or perfect timing. They simply require awareness that conditions are favorable right now and a willingness to act deliberately rather than reactively. As always, annual adjustments like these can meaningfully impact tax planning, retirement contributions, Roth eligibility, and Social Security strategies. If you’d like a personal analysis of how these 2026 changes affect your situation, we’re happy to prepare a customized projection for you.