A loss should be harvested whenever the value of a tax deduction significantly exceeds the transactions cost of the trades required to harvest the loss, immediately reinvesting the proceeds in a manner avoiding the wash sale rule. 2009 provides a perfect example of why waiting until the end of the year is a mistake. Losses that could have been harvested in March before the rally began have now become gains in many cases, meaning they can't be harvested.
Short-Term Losses Vs. Long-Term Losses
It's also important to realize any short-term losses before they become long term. Short-term losses are first deducted against short-term gains that would otherwise be taxed at higher ordinary income tax rates. Long-term losses are first deducted against long-term gains that would otherwise be taxed at the lower capital gains rate.
For example, before any loss harvesting, imagine a taxpayer has realized short- and long-term gains and unrealized short-term losses. These losses can be harvested, reducing the short-term gain that would have otherwise been taxed at higher ordinary tax rates. If not harvested until they became long-term losses, they would reduce long-term gains that would have been taxed at the lower long-term capital gains rate.
Investors should be checking their portfolios throughout the year for such opportunities. And if you're working with an investment advisor who takes most of the year off when it comes to tax management, perhaps it's time to find another advisor.