Harvesting losses in down markets
Many investors are familiar with the tax efficiency of ETFs. However, some investors and financial advisors use ETFs for tax-loss harvesting throughout the year in taxable accounts.
Here’s how it works: Investors can sell a position that has lost value, book the loss, and use it to offset capital gains elsewhere in their portfolio. The loss can also be used to offset noninvestment income. Also, losses can be carried forward into future years if they aren’t used in the current tax year.
With markets climbing steadily in recent years, there haven’t been many chances to take losses to offset gains in portfolios. However, the speed and breadth of the recent decline has created opportunities to harvest losses in many asset classes.
The wash sale rule and ETFs
When tax-loss harvesting with ETFs or any investment, it’s very important to remember the wash sale rule.
The wash sale rule is an IRS restriction on the repurchase of a “substantially identical” security within 30 days after the sale. However, if investors want to remain invested after taking the loss, they can invest in a similar investment that isn’t substantially identical.
Let’s take an example using ETFs. Investors can use the recent weakness to sell an index fund or ETF tracking the S&P 500 Index, and book the loss. Then, they can invest in a similar ETF, such as a multifactor ETF that invests in U.S. large-cap stocks, without running afoul of the wash sale rule.
Tax-loss harvesting throughout the year
Volatile markets are always difficult to navigate, but at least they create opportunities for investors and financial advisors who seek to lower their tax bill throughout the year. We believe ETFs offer an attractive vehicle to book losses in equities, while staying out of cash and remaining invested to participate in a potential recovery.
The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States.
This material does not constitute tax, legal, or accounting advice and neither John Hancock nor any of its agents, employees, or registered representatives are in the business of offering such advice. Please consult your personal tax advisor for information about your individual situation. The views and opinions on this site are subject to change and do not constitute investment advice or a recommendation regarding any specific product or security.