J.P. Morgan warns that selling investments for taxes triggers a hidden penalty

Your tax bill shows up, and the solution seems obvious: sell a few investments and move on. It’s quick, simple, and feels harmless.

The money moves from your portfolio to the IRS, the balance settles, and you carry on as if nothing happened at all. But a new analysis from J.P. Morgan Private Bank says that the transaction is silently doing more damage than you realize.

The firm identifies three specific costs hiding inside that seemingly straightforward decision to sell your investments for taxes.

Before you liquidate a single position this tax season, you owe it to yourself to understand what you are really giving up. The numbers behind this analysis could change the way you think about funding your next tax bill going forward.

Selling appreciated stock to pay the IRS can trigger a vicious tax cycle

The S&P 500 delivered a three-year total return of roughly 88% through the end of 2025, with annualized gains exceeding 23%, S&P Dow Jones Indices data show. That means many taxable brokerage accounts are sitting on substantial unrealized gains right now, especially in equity-heavy portfolios.

Here is where the trap springs on you as an investor with appreciated holdings inside a taxable brokerage account. When you sell those appreciated securities, you realize a taxable capital gain on top of whatever income you already owe taxes on.

That realized gain then increases your total tax liability for the following year and potentially pushes you into a higher bracket. You end up in a loop where paying this year’s taxes with investment sales automatically creates next year’s tax problem.

Federal long-term capital gains rates remain at 0%, 15%, or 20%, depending on your taxable income level and filing status, the IRS confirms. For the 2026 tax year, the 0% rate apples to taxable income up to $49,450 for single filers and $98,900 for married filing jointly. The 15% rate applies up to $545,500 (single) and $613,700 (MFJ), and the 20% rate applies above those thresholds.

Your portfolio’s balance and diversification take a hit when you sell under pressure

The second hidden cost that J.P. Morgan identifies in its analysis is what the firm calls “portfolio drift” following unplanned sales. Most investors facing a tax deadline instinctively grab whatever is easiest and fastest to sell, which usually means liquid ETF positions.

That instinct feels rational in the moment of urgency, but it quietly reshapes your entire investment strategy without your permission.

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Selling securities without a thoughtful plan can reduce your portfolio’s diversification and shift your asset allocation off its original design, J.P. Morgan Private Bank warns. The firm adds that this unintended drift can derail broader elements of your long-term wealth plan over time.

If your portfolio was built to hold 60% equities and 40% bonds, panic-selling your largest ETF position disrupts that ratio overnight. You may not notice the shift until markets move sharply against your newly unbalanced allocation several months or even quarters later.

Tax-loss harvesting offers a smarter exit if you must sell holdings this year

J.P. Morgan does not tell investors to never sell securities to cover a tax obligation under any possible circumstance this year. The firm argues that if you choose to sell, you should execute the sale with a deliberate strategy rather than grab the easiest option.

Tax-loss harvesting lets you sell underperforming investments first and intentionally realize losses that offset your realized capital gains. You then reinvest the remaining proceeds into similar but not identical securities to remain compliant with IRS wash sale rules.

“The key takeaway is that if your finances have even a little bit of complexity — capital gains, charitable goals, pretax retirement accounts — there are significant opportunities for tax savings,” said Mercer Advisors Chief Solutions Officer Jeremiah H. Barlow.

The IRS enforces a “wash sale” rule that prevents you from claiming a loss if you repurchase the same security within 61 days. That window extends 30 days before the sale date, includes the sale day itself, and runs 30 days after the transaction, IRS guidance confirms.

If your net capital losses exceed your gains for the year, you can deduct up to $3,000 against your ordinary income annually. Any remaining losses carry forward to future tax years, giving you a rolling tax benefit that continues compounding in your favor.

Key rules to keep in mind with tax-loss harvesting this yearThe 61-day wash sale window applies across all of your accounts, including taxable accounts, IRAs, Roth IRAs, and your spouse’s accounts.Swapping one S&P 500 index fund for another fund tracking the exact same index may still trigger the wash sale rule under IRS review.Selling a stock at a loss in a taxable account and repurchasing it inside your IRA permanently destroys the loss deduction for good.You should consult with a qualified tax professional before executing any tax-loss harvesting strategy across your investment portfolio this year.

Use tax-loss harvesting strategically when selling investments this year to offset gains, avoid wash sale traps, and preserve long-term tax advantages.

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The compounding growth you lose by selling has its benefits

The third hidden cost J.P. Morgan raises is the one that may ultimately sting the most over a full lifetime of investing. When you sell high-conviction holdings that carry embedded gains, you forfeit the compounding effect those investments were quietly generating for you.

Compounding works by earning returns on top of your previous returns, and every dollar you pull out permanently breaks that chain. You originally bought those positions for a reason, and selling them to cover taxes removes the very engine driving your long-term growth.

The S&P 500 added roughly $26.3 trillion in market value over the past three years, with another $1.9 trillion flowing to dividends, S&P Global data show. Investors who sold winning positions to cover taxes during that historic stretch missed some portion of those gains permanently.

A $50,000 sale today does not just cost you $50,000 right now; it costs every dollar that money would have earned for decades.

J.P. Morgan outlines alternatives that keep your portfolio intact through tax season

The firm’s primary recommendation is to consider using a portfolio line of credit secured by your existing marketable securities, rather than selling. Borrowing against your holdings lets you pay the tax bill without triggering any taxable event or disrupting your investment allocation.

There is generally no capital gains tax triggered when you borrow against securities, and your portfolio stays fully invested throughout the process. Your positions remain in place, your diversification stays intact, and the compounding engine keeps running without any interruption at all.

Related: J.P. Morgan shares tips to protect your portfolio amid Middle East tensions

Using excess cash is another viable option, but J.P. Morgan cautions that draining your liquidity reserves creates its own problems. If an emergency expense or an opportunistic investment opportunity arises shortly thereafter, you may find yourself without the cash reserves you need.

The firm emphasizes that the best approach depends entirely on your individual financial situation, tax bracket, and broader wealth plan. You should work with a qualified tax advisor and a financial planner to evaluate which specific strategy fits your circumstances and goals.

Important risks to understand with securities-backed borrowing

This strategy can be powerful, but it comes with risks you need to consider.

Your lender can increase or decrease the collateral value assigned to your securities at any time without giving you advance notice.A significant market decline could force you to post additional collateral or pay down the credit line to avoid a forced liquidation.Interest costs on the borrowed amount accumulate over time and should be weighed carefully against the tax savings the strategy creates.Securities-backed lending may not be suitable for every investor, so review all loan documentation carefully before proceeding with this option.A step-by-step framework for evaluating your next tax payment decision

Before you sell a single share this tax season, take 30 minutes to map out what each funding option costs you.

Steps to complete before liquidating any investments for taxesCalculate your total unrealized gains across all taxable accounts, so you know exactly how much capital gains tax a sale would trigger.Check whether you hold any positions currently trading below your purchase price that could be harvested for losses to offset your gains.Review your current asset allocation and identify which positions you could sell with the least disruption to your diversification targets.Compare the total cost of borrowing against your portfolio versus the combined tax and opportunity cost of selling appreciated holdings outright.Consult a tax professional and financial advisor before making any final decision, especially if your portfolio has significant embedded unrealized gains.

The 2026 standard deduction sits at $16,100 for single filers and $32,200 for married couples filing this tax year jointly, the Tax Foundation reports. Understanding your deduction and your bracket helps you estimate how much a securities sale would cost you in total taxes.

Single filers with taxable income of $49,450 or less qualify for the 0% long-term capital gains rate for the 2026 tax year. Married couples filing jointly reach that same 0% threshold at $98,900 in taxable income, the IRS confirms.

If your income sits near one of these thresholds, selling appreciated investments could push you into a higher capital gains bracket entirely. That is exactly the kind of hidden penalty J.P. Morgan is warning you about, and it is avoidable with proper advance planning.

The cost of convenience is measured in decades, not dollars 

Tax season creates urgency, and that urgency leads to shortcuts that may seem harmless but compound into real financial damage over the years. J.P. Morgan’s analysis serves as a reminder that the fastest solution is rarely the cheapest one when it comes to managing investments.

You do not need to become a tax strategist overnight, but you do need to slow down before you press the sell button. The three costs J.P. Morgan outlines are all avoidable penalties that disappear when you approach the decision with a proper plan.

Whether you borrow against your portfolio, harvest losses strategically, or use a thoughtful combination of approaches, intention is everything. Every dollar you keep invested today has the potential to earn returns for you over the next 10, 20, or 30 years.

Talk to your tax advisor and your financial planner before your next tax payment is due this season, not after the sale happens. The conversation may take an hour, but the savings could last a lifetime if you get the strategy right this year.

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