Here's my practical approach to rebalancing a three-fund portfolio without triggering unnecessary taxes.

My target allocation: 80% VTI, 15% VXUS, 5% BND.

When I rebalance, I prefer to use new contributions rather than selling existing positions. If VXUS has underperformed and is now 12% of my portfolio instead of 15%, I redirect contributions to VXUS until the allocation normalizes. This avoids realizing gains in VTI.

In tax-advantaged accounts (401k, IRA, HSA): I rebalance freely. No tax consequences. I sell overweighted assets and buy underweighted ones whenever the allocation drifts more than 5 percentage points.

In taxable accounts: I rebalance almost exclusively through new contributions. If I must sell to rebalance, I look first for lots held over a year (long-term capital gains rate) and tax-loss harvesting opportunities to offset any gains.

Annual rebalance trigger: drift of more than 5% from target allocation. On a $300,000 portfolio this means acting when any asset class is off by more than $15,000. Smaller portfolios may not need rebalancing at all — just direct new contributions to the underweighted asset.