Tax-loss harvesting is often bandied as a no-lose way to reduce taxes. Unfortunately, there are many pitfalls and under certain circumstances could actually increase your tax liability. Paying a service like Betterment to increase harvested losses only really works in a few limited situations.
Tax rules define limits on losses. Wash sale rules suspend losses when an identical or “substantially identical” stock is purchased within 30 days before or after the sale. The loss is not technically lost. The basis is adjusted on the new purchase to reflect the original purchase and sale. But the loss is not allowed until the stock is sold that is not a wash sale.
A substantially identical stock (or mutual fund, index fund, ETF, et cetera) need a clear definition. Buying the same exact stock is an easy call; wash sale rules apply. But what about index funds? If you sell a Vanguard S&P 500 index fund at a loss and buy a Fidelity S&P 500 index fund within 30 days, is it a wash sale? Yes, because it is substantially identical. What about selling the same Vanguard S&P 500 index fund and within 30 days buy a Total Market index fund? That is not substantially identical and therefore not a wash sale. Platforms like Betterment take this to an extreme, for a fee of course.
Now we get into the details and how they can increase your tax liability.

Loss Limits on Your Tax Return
Losses, except for wash sale losses, can be used to offset other capital gains, long or short. In addition to the capital gains offset, $3,000 per year of unused loss is used to reduce other income until all losses are deducted. Most states follow the same formula. Wisconsin, however, is an exception, only allowing $500 of capital losses used against other income per year.
Capital losses only apply to the state you are a resident of when the loss is realized. A loss realized, for example, in Minnesota will not transfer to another state if you move. You can have a different capital loss carryforward on your federal return from your state return. That means the tax advantage on your state tax return will not always follow your federal tax return and future capital gains as a resident of another state would be taxed while unused losses are still claimed on the federal return.
Using a platform that automates and maximized capital losses are frequently a bad idea. Not only do you pay for the service, but the losses you can use currently are frequently limited. Fees associated with these platforms tend to eliminate, or nearly so, any tax benefit.
Where tax-loss harvesting works best is when you have a large current capital gain. Realizing losses is a powerful tool for reducing your tax liability in such cases. Excess losses will still only give you $3,000 of deduction against other income with the remainder carrying over to the next year. Planning, as always, is required.

Where You Live Makes a Difference
Now we get to the real problem with harvesting losses.
We discussed how excess losses carried forward will not transfer between states. You also need to consider death. When you die your capital losses really are lost. They do not carry over. They do not transfer to beneficiaries, not even your spouse!
To make matters worse, where you live determines the rules for how much is lost. There are two kinds of states in the U.S.: equitable property and marital property states. There are currently 9 marital property states: Arizona, California, Louisiana, Nevada, Idaho, New Mexico, Texas, Washington and Wisconsin. The other 41 states are equitable property states.
For capital loss purposes only, losses follow the owner of the stock at the time of sale in equitable property states and is split 50/50 between spouses in marital property states. That means if a capital loss carryforward exists when you die, your spouse does not get to use any of that loss unless you live in a marital property state where your spouse gets 50% of the loss carryforward. Neither the kids nor any other beneficiaries of your estate benefit outside this.
This is best understood with an example. Bob and Mary are married. Bob bought $500,000 of IBM stock. A bear market caused Bob concern so he sold at a loss of $100,000. There are no other capital gains.
As long as Bob and Mary are alive and remain married, they can take $3,000 per year as a deduction against other income until the entire loss is used. If Bob and Mary divorce, the unused capital loss follows Bob fully in an equitable property state and Bob and Mary share the used loss carryforward 50% each in a marital property state.
Here is an example of how taxes could be impacted negatively.
Using Bob and Mary again. Bob bought $500,000 of IBM and later sold at a loss of $100,000. Two months later Bob sees the market recover and buys back the same number of shares for $450,000.
The $100,000 loss is allowed and is not a wash sale since the stock was not purchased within 30 days of the realized loss. However, the loss can only be deducted against other income by $3,000 per year.
However, IBM declines again to $400,000 in value when Bob dies.
Basis is adjusted, up or down, to the value on the date of death. Mary now owns $400,000 of IBM shares with a basis of $400,000, even though Bob paid $450,000 for the shares. In an equitable property state Mary losses all of Bob’s capital loss carryforward and she retains 50% of the loss carryforward in marital property states. (In a marital property state Mary owns half the shares which will not get a step-down in basis.)
In either case, Mary would have been better off if there was no capital loss at all. (If Bob never sold and bought back, Mary would have had access to the full loss because none would have been realized to that point.) Half or all of Bob’s capital loss carryforward is lost forever at his death.
If Bob was single, all capital loss carryforwards would be lost. Losses can not be inherited. (Not to be confused with losses by the estate which can be passed to beneficiaries in some cases.)
Facts and circumstances dictate the most appropriate actions. Tax-loss harvesting for many is no more than spinning wheels with almost no change in the outcome. Paying to harvest losses without a large imminent capital gain on the horizon, as a result, is usually a bad idea.
The one exception is when you realize a large capital gain. It is then when you benefit the most on the current tax return. If a large capital gain is likely, tax-loss harvesting is a plan. Often you can handle the harvesting manually at no cost. Sometimes you need to roll up the sleeves to maximize the benefit. Then a platform like Betterment can provide value.
Finally, be careful with platforms that harvest losses. When I prepare tax returns I get to see the end results. Often times the platforms harvesting losses perform poorly compared to their benchmarks and they charge a fee for the service. These things, weighed against the tax benefits, needs consideration before executing a tax-loss harvesting plan.
Because the rules are complex with many moving parts, it is wise to consider consulting a tax professional before committing to any strategy if you are unfamiliar with all the facets of tax-loss harvesting.
Additional Reading
Tax-Loss Harvesting is Killing Your Nest Egg The Wealthy Accountant