As mentioned here, Tax Loss Harvesting (TLH) involves selling tax lots that have declined in value. In a Pairs based TLH method, when a tax lot is sold for a loss, we replace the sold security with another security that is not "substantially identical" and wait at least 30 days to buy back the original security.

If we select highly correlated securities (for example VB and VXF which have a stock price correlation of 98.7%*) then we are able to replace a large part of our original stock with something that usually behaves relatively similarly.

Double maintains a list of securities and their paired securities that they are eligible to be replaced with. You can download a csv of this list here. We create this list by looking at stock price correlations, expense ratios and the avg volume of any replacement securities, prioritizing liquid and less expensive replacements for our clients.

Our optimizer works by putting each stock along with it's possible replacement pairs into a asset class. We generally use a single replacement pair per security, and this can vary by account since a security can only be replacement security once. This asset class is then given a target weighting. When a TLH opportunity arises, the optimizer will replace the target security with it's correlated pair.

Pairs based TLH strategy has some drawbacks for certain account types, that we try and solve with our Direct Index TLH mode.

For diverse portfolio comprising 100+ securities, there are often not enough replacement stocks that are highly correlated to have a replacement for every thing. This leads to the optimization engine being unable to find a replacement for a given TLH opportunity, and can lead to either capturing the TLH opportunity but staying in cash, or not capturing the TLH opportunity at all. This depends on the entire picture of an account including wash sale, cash on hand vs targets, etc.

* Calculated as the 1 year daily correlation between price changes as or August 8, 2024