Suppose that you individually purchase each of the 500 or so stocks that go into an S&P 500 index fund (and in the appropriate amounts to preserve the market capitalization weightings). Now, the stocks start bouncing around, and you decide to sell some shares of some specific stock(s) in order to tax harvest. You no longer have an index fund that matches the conventional S&P500 index fund model.

If you are interested in tax loss harvesting, keep in mind that losses can only offset ordinary income up to the amount of $3,000 in a given tax year (with excess being carried forward). If you have other investment/capital losses (i.e., not ordinary income) then those get offset first. But if you have losses outside of the "index" fund you are creating, then you should consider just getting out of those investments altogether, rather than trying to offset losses in those investments by gains in the index. And if you are trying to offset gains in other investments with losses in the index, you are liable to end up working very hard for not a great deal of overall return value. And in the process you will skew the "index" into something that is "not an index."

It sounds to me like you are thinking of letting the tax tail wag the dog. I like what Brad and several guests (notably Sean Mullaney, the FI tax guy) have suggested a number of times. That is, make your investment decisions in such a way as to maximize the return (and this includes return on hassle, in addition to the raw numeric return). Then, make tax decisions to optimize after that. Otherwise, you are likely to sacrifice lots of return for potentially very small tax optimizations. Remember, paying taxes is "good" in the sense that it is a sign you are winning.