Finding silver linings with tax loss harvesting


Daniel Prince, CFA Jun 16, 2022

KEY TAKEAWAYS

KEY TAKEAWAYS

  • The market selloff this year has a silver lining: It may provide opportunities for a strategy known as “tax loss harvesting,” in which an investor can unlock potential tax benefits.
  • Tax loss harvesting strategies can be used to realize losses in single stocks, bonds, funds, and ETFs in a taxable account.  Investors can sell assets at a loss where realized losses can be used to offset realized capital gains as well as ordinary income.1
  • With almost 400 ETFs, iShares offers the tools to keep you invested. The Exposure tool helps you find the exposure you are looking for.

Markets have been roiled in 2022, as persistent inflation and rising rates have spooked investors. The pain has been widespread: U.S. stocks and bonds have both declined by more than 8% year-to-date.2 Since 1976, there have only been 10 months where both stocks and bonds have each posted losses greater than 2%.3

Growth of hypothetical $100: U.S. equities vs. U.S. bonds

Line chart showing the growth of hypothetical $100 invested in US equities vs. US Bonds from Jan. 1, 2022 to May 30th, 2022.

Source: Morningstar Direct as of May 31, 2022. US Equites and US Bonds are represented by the S&P 500 Index and Bloomberg US Aggregate Index respectively. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Chart description: Line chart showing the growth of hypothetical $100 invested in US equities vs. US Bonds from Jan. 1, 2022 to May 30th, 2022. US Equities, represented by the S&P 500 Index, lost 12.8% while US Bonds, represented by Bloomberg US Aggregate Index, lost 8.9%.


It can be difficult to hold on to investments while markets whipsaw, and to learn the bitter truth that markets don’t always deliver outsized, orderly returns. But as the old saying goes, “what seems like a curse may be a blessing.” Investors can keep their long-term goals in sight, while taking steps to mitigate some of the pain of seeing their investments decline.

TAX LOSS HARVESTING WITH ETFs

TAX LOSS HARVESTING WITH ETFs

Tax-loss harvesting is the act of selling an investment below its purchase price to realize a loss in a taxable account. Investors may use sales proceeds to purchase a comparable investment to maintain a similar exposure. Harvested losses can be used, dollar for dollar, to offset realized capital gains. In addition, investors can offset up to $3,000 per year of regular income with realized losses. If an investor recognizes more losses than gains, or has already offset the $3,000 income cap, losses can be carried forward indefinitely.

 

Rules preclude investors from recognizing losses and then quickly buying back their original investment. These “wash sale” restrictions mandate that an investor cannot realize a loss on the sale of an investment and then buy a “substantially identical” security, beginning 30 days before and ending 30 days after a security sale.4 Depending on the specific securities involved, executing a tax loss harvesting strategy and reinvesting to maintain a similar exposure can be accomplished with ETFs.

Illustration showing an equation and a hypothetical way to tax loss harvest.

For illustrative purposes only.

Chart description: Illustration showing an equation and a hypothetical way to tax loss harvest. The three components of the first side of the equation are: 1) Sell investments that have declined in value, 2) realized losses offset gains on income tax returns, and, 3) buy an ETF with similar  exposure; consider iShares ETFs. The sum of these three parts provide a tax benefit and help you stay invested.


OPPORTUNITIES ABOUND

OPPORTUNITIES ABOUND

Over 70% of stocks of in the U.S. stock market have fallen in price year-to-date, while U.S. bonds recently saw their largest drawdown since 1980.5 Selling single U.S. stocks at a loss and buying an ETF that seeks to track a U.S. broad based index may avoid violating wash sale rules while helping to stay invested. To be sure, tax loss harvesting opportunities are plentiful; many formerly high-flying stocks have fallen considerably, some of them as much as 50% year-to-date. Similarly, investors can consider selling out of individual bonds and buying diversified fixed income ETFs as a way to bank losses.

 

Tax loss harvesting can also apply to funds. Selling out of a mutual fund/ ETF at a loss and buying a different fund with a similar objective can help position your portfolio for future growth while attempting to reduce your total tax bill.  Alternatively, investors may want to consider shifting some holdings to an ETF with a different objective. In both scenarios, tax benefits may be unlocked with the aim of staying invested.

CONCLUSION

CONCLUSION

With almost 400 ETFs, iShares offers the tools to stay invested. Our Exposure tool can help you find alternatives to stocks, bonds, and funds to enact the strategy.

 

In addition to sticking to your overall investment plan, maintaining good portfolio hygiene can include striving to achieving more favorable after-tax results. While current market volatility may get your portfolio down, consider tax-loss harvesting to get your tax offsets up.

Daniel Prince

Daniel Prince, CFA

Head of iShares product consulting for BlackRock’s U.S. Wealth Advisory Business and U.S. Head of iShares Core ETFs

Kaitlin Arciaga, CFA

Product Consultant

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