Advisors like to be in the business of helping clients achieve their hopes and dreams. Helping make a nightmare less awful isn't exactly the way they prefer to frame the issue. And while no one can undo the drubbing many portfolios took this year, it is still possible to squeeze a little benefit out of the situation through some smart tax-loss harvesting.

Selling a losing investment now generates a tax loss that can be subtracted from this year's capital gains. And if there aren't enough capital gains, a credit of up to $3,000 in ordinary income can be carried forward into subsequent years. This isn't exactly a secret, but studies going back more than 20 years have found that investors simply don't take advantage of this as much as they could. Indeed, John Nersesian, managing director of wealth management services at Nuveen Investments, says that even though the $3,000 provision hasn't changed in at least 25 years, a surprising number of investors leave this gift from Uncle Sam on the table.

Know When to Fold 'Em

Researchers have found two reasons that loss-taking doesn't happen as often as it should. One is that a sale requires accepting the notion that the value of an asset has changed and, typically, people cling to the idea that the price they paid for an asset is still the 'real' value. Another is that losses are simply painful to investors. Not selling the loser is a way to ignore both of those unpleasant realities.

A third reason is that many advisors don't like to remind them of a loss. While some advisors are good at holding their clients' hands through a tough market, others steer clear of that conversation altogether. "A lot of them are hiding under their desks right now," says Scott MacKillop, president and chief compliance officer of Frontier Asset Management in Denver.

That's unfortunate, because a good tax program can be a reliable source of value, especially in a tough year. Smart tax management can improve performance by about 1% to 1.5% a year over a 10-year period, according to Douglas Rogers, author of Tax-Aware Investment Management and chief investment officer of Laird Norton Tyee, a Seattle-based investment firm. For advisors with the courage to do the right thing, selling the losers is only a first step. To avoid accidentally unbalancing a portfolio or missing out on a rebound, proceeds should be reinvested in a similar kind of investment, says Rogers: a growth fund for another growth fund, or a Pfizer for a Merck, for example.

But advisors need to take care not to buy the same stock for the next 31 days, in order to avoid triggering a violation of the wash-sale rule, warns Bob Scharin, a senior tax analyst at Thomson Reuters. Another mistake: selling a stock and then buying the same stock in an IRA, which the Internal Revenue Service recently declared was off-limits, he says.

One other potential pitfall: check for a redemption fee on the mutual fund. If the fee is high, MacKillop says, it's possible for your client to incur an out-of-pocket expense now that's actually higher than the potential savings on taxes next year.

Winning by Losing

Experts say an even better strategy than end-of-year loss harvesting is to prune losers year-round. That type of disciplined approach can boost overall performance. One common rule-of-thumb: sell if an asset's value dips 15%.