Rebalancing a taxable account means selling winners — and paying tax on the gain. Enter your drift and cost basis to see exactly what the trade costs, and how much deferral value you give up.
65 means you have a 35% unrealized gain on the shares you'd sell.
| Scenario | Portfolio | Amount Sold | Gain Realized | Tax Due | % of Portfolio |
|---|---|---|---|---|---|
| Small drift, mostly long-term | $500,000 | $40,000 | $14,000 | $2,800 | 0.56% |
| Large drift, low basis | $500,000 | $75,000 | $60,000 | $12,000 | 2.40% |
| Taxable + short-term gains | $500,000 | $30,000 | $13,500 | $3,308 | 0.66% |
| With harvested loss offset | $500,000 | $75,000 | $40,000 | $8,000 | 1.60% |
| No state tax, high earner + NIIT | $1,000,000 | $110,000 | $55,000 | $13,090 | 1.31% |
The two variables that dominate the answer are how far the allocation has drifted and how low the cost basis is. A portfolio that has drifted 8 points with a 35% embedded gain costs about 0.5% of assets to rebalance; one that has drifted 15 points with an 80% gain costs nearly 2.5%. Both are usually worth paying — but the second case is where loss harvesting and new-money steering earn their keep.
The cheapest rebalance is no trade at all. If your target is 60/40 and you are at 68/32, direct every new 401(k) or brokerage contribution into the underweight asset until the allocation returns to target. For a $500,000 portfolio with a 15-point drift, a $20,000/yr contribution stream closes the gap in roughly two years at zero tax cost.
Traditional IRAs, Roth IRAs and 401(k)s have no capital gains tax, so a trade there is free. If you hold the same target allocation across both a taxable and a retirement account, treat the two as one portfolio and do all rebalancing in the retirement account. This is the single highest-value structural decision available and costs nothing to implement.
Realized gains can be offset by realized losses dollar-for-dollar, with up to $3,000 of net loss deductible against ordinary income and the remainder carried forward. Pairing overweight sales against harvested positions converts a tax bill into a deferral. Watch the wash-sale rule: repurchasing a substantially identical security within 30 days before or after the sale disallows the loss.
Rebalancing is about risk control, and letting a portfolio drift 20 points because of tax is a decision to accept materially more equity risk than you chose. A common rule of thumb is to use 5/25 bands: rebalance when an allocation drifts 5 percentage points absolute, or 25% relative, whichever comes first. At that trigger the tax cost is typically under 1% of the portfolio — a small price for restoring the risk profile you intended.
The tax paid on a rebalance is not permanently lost — it is paid early. The money that leaves your portfolio stops compounding, and that forgone growth is the true cost. At a 7% return, $2,800 paid today would have grown to roughly $10,800 over 20 years, so the deferral value of not selling is about $8,000 on a $500,000 portfolio.
But the comparison is incomplete without the risk side. A portfolio that has drifted from 60% to 75% equities carries roughly 25% more equity risk than you chose. In a severe drawdown, that extra risk can cost far more than the tax on rebalancing. Calculating the tax cost in isolation — as this tool does — tells you what rebalancing costs, not whether it is worth it. Use the 5/25 band rule to decide when the drift is large enough that the risk argument wins.
Many articles say simply "rebalance in your tax-advantaged accounts and you never pay tax." That works only if the target allocation exists in the retirement account. An investor whose bond allocation sits entirely in a taxable account — common for people who bought municipal bonds for the tax exemption — has no way to rebalance tax-free. In that case, the practical options are to redirect dividends and new savings into bonds, or to accept a wider drift band.
Asset location is the upstream fix: place tax-inefficient assets (bonds, REITs) in the retirement account and tax-efficient assets (broad index funds, individual stocks held long-term) in taxable, then rebalance exclusively in the retirement account. Rebuilding toward that layout takes years of new contributions but permanently reduces the cost of every future rebalance.
⚠️ Important: This calculator estimates the federal and state capital gains tax triggered by selling an overweight position to rebalance. It assumes the sold lots have a uniform cost basis and does not model specific-lot selection, the 0% long-term bracket phase-in against ordinary income, the $3,000 annual limit on net capital loss deductions, wash-sale disallowance, or the interaction with the AMT. It is a planning estimate, not a tax return.