Challenge Accepted: How Ridgeline Reimagined Tax Loss Harvesting for Investment Management

“Excuse me while I wipe the drool from my mouth.”

That’s an actual quote from one of Ridgeline’s customers in response to seeing a preview of some new features we were demoing for tax loss harvesting that left this person slack-jawed with wonder of what is possible  — but it’s a good gauge of the amazement we hear from customers across functions when they first see one of Ridgeline’s solutions to their long-standing business process headaches that their legacy vendors and disparate systems are unable to address.  

This particular woe was around tax loss harvesting. Many asset managers with taxable customers engage in tax loss harvesting in the latter part of the year as they prepare to manage their clients’ annual tax burden. This often painful exercise involves analyzing the gains realized to date, determining current positions with losses, selling those positions, notifying the custodians of the correct lot to sell, and ensuring you do not create a wash sale by repurchasing the position within the next 30 days. 

For many managers, this process typically involves three to four disparate systems. The realized gain/loss report and unrealized gain/loss reports are run in accounting to determine the lot harvest opportunities. The trades are manually entered into the OMS, where the specific lots are selected. A security level restriction is then placed in the compliance system to prevent wash sales, along with a reminder to remove the restriction placed in the user’s calendar 31 days out. The next day, the user typically logs into the custodian system to ensure the correct lots were actually sold. The process is tedious, error-prone, and a major drain on the portfolio manager’s valuable time.    

In late 2024, Ridgeline customers asked how we would streamline this process through our single platform with unified data. At Ridgeline, we love it when customers challenge us to rethink old, tired processes and replace them with new, innovative functionality, so we gladly accepted the challenge. 

First, rather than make users run reports to determine the realized and unrealized gains and losses, we incorporated those figures directly into the portfolio management screens. Users can pull up an account or group of accounts and see the year-to-date gain/loss figures as well as the unrealized gain/loss for each position. We also show the total loss for underwater lots, allowing the PM to quickly identify those positions with harvestable lots. Users already have the ability to drill into the lots in a position to ensure they are closing the correct lots. 

The next step is the wash sale restriction. As Ridgeline is an integrated system, we have direct access to positions sold for a loss within the past 30 days. Once an account is tagged as subject to wash sales (on initial setup), Ridgeline automatically checks for losses for that security within the past 30 days and warns the user about a proposed buy. You don't need to set up special restrictions or set calendar reminders—you are covered for wash sales.

Once a trade is executed, the harvested lots need to be communicated down to the custodian so losses are actually realized — if the custodian closes the wrong lot, a gain could be realized rather than the intended loss.  Ridgeline has incorporated tax lot information into its trade settlement processes and sends this information to any source that can accept it. Whether you communicate allocations via CTM, FIX allocation messages, or file uploads, we can send the details of the harvested lot through the settlement process.

As a final step, we ensure the custodian has closed the right lot. Ridgeline has introduced tax lot-level reconciliation, allowing users to ensure their lots match those of the custodian. If the custodian closed a different lot than you intended, the tax lot reconciliation will proactively notify you and allow you to correct the transaction with the custodian to ensure the loss was realized.  

All of the steps in this workflow take place seamlessly and without additional interaction from the user.  The best part - we turned much of this functionality around in a matter of weeks.  Ridgeline is a SaaS Cloud based product, and we push out updates to our entire client base weekly - In fact, the trading team alone delivered over 250 new features to customers in 2024.  As individual features were ready, they were released to customers so they could begin to use them immediately.  No painful upgrade process, no unexpected impact on other areas of the platform, and no dependency on other applications.

What did customers think? In addition to the drooling comment, we heard, “I literally have 8 screens open right now trying to coordinate what you just showed me.” At Ridgeline, we enjoy the satisfaction of responding quickly to client needs and getting innovative solutions into their hands in a matter of weeks, not years. 

Does your asset management software give you the same type of responsiveness? If not, we invite you to see what Ridgeline is all about; please request a demo on this page or send a note to hello@ridgelineapps.com.