Tax-loss harvesting is a popular idea this time of year.
You can sell securities that have lost value in your portfolio this year to offset any taxes you might have incurred on capital gains from securities that performed well.
ETFs are tax-friendly vehicles that rarely report capital gains to begin with, but there are still opportunities to implement tax-loss harvesting within ETF portfolios, and here, five ETF strategists share how they do it, and why.
Gary Stringer, president and chief investment officer; Memphis, Tennessee-based Stringer Asset Management
While most of our business is “model delivery,” we take advantage of tax-loss harvesting where we can. We try to harvest losses throughout the year rather than wait until the last minute. Market volatility gives us opportunities to harvest losses as the year progresses.
For example, market volatility in January and February offered plenty of opportunities to harvest losses. We might sell a sector ETF that is down and replace it with our next best idea, or just hold a broad equity ETF through the wash-sale period.
Harvesting losses in this way gives us greater flexibility when managing our tactical allocations because we don’t have to worry as much about realizing short-term gains if the market already gave us the opportunity to harvest losses earlier in the year.
Having the additional freedom to move is an important advantage of harvesting losses throughout the year.
Dave Haviland, managing partner and portfolio manager; Needham, Massachusetts-based Beaumont Capital Management
Historically, in some of our strategies—such as the BCM Sector Rotation and BCM Income—we do tax-loss harvesting, but in the others suites, no. However, as a tactical manager, our three rules-based systems tend to realize the losses as a matter of course.
Does it add to returns? For taxable accounts, yes, especially if you’re negating a short-term capital gain.
Tax-loss harvesting can be important, especially for high-income earners and residents of states like Massachusetts, where the short-term capital gains tax is 7% higher than the long-term rate. Obamacare adds another 4%. In a worst-case scenario, the total tax rate on short-term gains could be as high as 58%.
There’s not really a “proper” way to do tax-loss harvesting. At the strategist level, we have to be cognizant of tax-deferred accounts and the costs of trading into an alternative. Therefore, we only take relatively large unrealized gains, and are quite judicious about it.