5 Views On Tax Loss Harvesting

November 14, 2017

Will Wall, manager of trading & operations, RiverFront; Richmond, Virginia

We don’t do any tax harvesting, per se, in the portfolios from an investment management or portfolio decision-making perspective, but since our business is underpinned by roughly 5,500 retail [separately managed accounts] over which we have trading discretion, we do offer the ability to harvest gains or losses on an individual account basis based on the client’s individual wishes or needs.

And while we don’t harvest losses on the portfolio level, our portfolio managers are at least tax sensitive or tax aware in the sense that they might choose to wait an extra few days before selling a security if it means realizing long-term over short-term gains for that particular position.

Michael McClary, chief investment officer, ValMark Advisers; Akron, Ohio

As the asset manager, we typically leave the tax-loss harvesting decision up to the client and the advisor. We feel tax-loss harvesting should be based on each individual client and their particular tax situation.

We offer tax-loss harvesting and feel it can add value, but we recognize it doesn’t always add value. While taxes are an important consideration in managing taxable accounts, we caution investors from making them the only consideration and having the tail wag the dog. We see many investors afraid to realize a gain or be overly concerned with harvesting.

Tax-loss harvesting can be a very valuable tool. However, like any tool, it should be the right tool for the job. We find many investors implement tax-loss harvesting blindly regardless of the circumstances.

There are many situations where tax-loss harvesting is a no-brainer, adding sizable value for investors. For example, a client may be entering the end of the year with a large realized gain in an energy stock and decide to harvest some tax losses to offset gains in the same year. This would have a near-term cash payoff with low risk. Likewise, they could use the Vanguard Energy ETF (VDE) as a way to remain invested with the proceeds of the tax-loss sale.

On the other hand, there are situations where a systemic tax-loss harvesting strategy might just create smoke. For example, let's assume a client has a significant realized tax loss already banked from previous years; for the sake of this example, let's say $500,000.

Now assume they have an unrealized tax loss of $50,000 in a broad-based index fund or ETF, and it's getting to year-end. Some investors would sell out to realize the basis, invest in another index fund or ETF tracking a similar index, then repurchase the original position after 30 days. What has this accomplished?

  1. It’s added another $50,000 to an already-large bank of realized losses, which might take a decade or longer to use up.
  2. The basis has been reset lower on the asset class exposure. Instead of the next $50,000 in growth simply being tax free until the position rises to its original basis, now you’ll have to track an unrealized gain and the realized tax-loss bank.
  3. Some transaction costs were realized.
  4. There’s potential that some small market loss occurs on the swap.

So, was it worth it? Well, it didn't really hurt anything, but it didn't really add any value either.

Contact Cinthia Murphy at [email protected]

 

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