Learn how an automated tax-loss harvesting service might help you optimize after-tax returns.
Looking to pursue an optimal, tax-efficient portfolio balance? Consider tax-loss harvesting. It’s a process designed to take advantage of an IRS rule allowing realized losses to offset the realized gains on in your taxable portfolio. This process may potentially lower your tax liability, on the condition that all the trades are closed out in the same calendar year.
Think of tax-loss harvesting as you would the annual grain harvest. For farmers, harvest is a time to reap the rewards of their labor and plan next year’s crop allocation. It used to be quite laborious, but today’s harvesters, equipped with the latest diagnostics technology (plus Wi-Fi and air conditioning), can automate the process and help farmers harvest more efficiently.
It’s not a perfect analogy, though. For a farmer, harvesting is all about gathering up the crop to sell for a profit. Although tax-loss harvesting can be a component of total investment returns, it’s through the more indirect process of potential tax liability minimization. Both use the latest technology to help speed the process through automation.
To illustrate the strategy in its most basic form, consider two investors, Investor Allen and Investor Bea.
In this scenario, Investor Allen has a $1,000 profit on his ABCD trade, which will be subject to capital gains tax.
Get solutions that fit your goals, even when they change and grow.
See which managed portfolio* might be best for you.
*Managed portfolios are offered by TD Ameritrade Investment Management, LLC.
In this scenario, although Investor Bea has the same $1,000 profit as Investor Allen, because Investor Bea sold XYZ before the end of the year, the $1,000 loss on the stock is considered “realized” and may be used to offset ABCD’s gains—potentially eliminating capital gains tax.
If you don’t have any capital gains or if you have more losses than gains, you can use the losses to offset up to $3,000 of other taxable income per year. After using your losses to offset capital gains and income, you can use any remaining losses to offset gains or income in later years (under current tax laws).
Now that you’ve got the basics, let’s take it a step further and add automation.
Executing on a tax-loss harvesting strategy is automated and done at no extra cost to TD Ameritrade Investment Management, LLC clients with taxable accounts who are invested in a managed ETF portfolio. The portfolio is monitored daily, and when a tax-loss harvesting opportunity is identified, the position will automatically be sold and the proceeds invested into a replacement security designed to maintain the portfolio’s target allocation.
Sometimes an opportunity pops up in, say, October that may not be there at the end of the year. With an automated tax-loss harvesting service (as opposed to a periodic or end-of-year manual scan), opportunities can be acted on as they occur.
To better understand how tax-loss harvesting works, imagine a scenario in which someone invests $100,000, putting $60,000 in ETF A and $40,000 in ETF B.
At the end of one year, ETF A has declined by $7,000 and is now worth $53,000. But ETF B has risen by $10,000 and is now worth $50,000.
Without tax-loss harvesting, the client has a realized gain of $10,000 from ETF B and has a potential tax bill of $1,500 (assuming the client sells the shares and pays the 15% capital gains tax on the profit).
With tax-loss harvesting, TD Ameritrade Investment Management has been monitoring the two ETFs daily all year, selling ETF A to offset gains from ETF B. At the end of the year, instead of paying a $1,500 tax, the investor has only a potential tax bill of $450, for a potential tax savings of $1,050.
Want to see it as a flow chart? Take a look at figure 1.
Investors should educate themselves about the IRS’s wash sale rule, which prohibits them from claiming a tax loss if they repurchase the same security (or a substantially similar security) either 30 days before or 30 days after selling a security for a loss. To evaluate whether you violated the wash sale rule, the IRS reviews the trading activity for all of your accounts. In other words, the IRS looks at trades you place in other accounts at TD Ameritrade, at other brokerage firms, and in IRA or Roth IRA accounts, as well as transactions your spouse made and transactions by a business entity you control to determine if you violated the wash sale rule.
TD Ameritrade Investment Management’s tax-loss harvesting service only scans your managed portfolio on an account level basis (not all of your TD Ameritrade Investment Management portfolios collectively). Each eligible portfolio must be enrolled separately in the tax-loss harvesting service; the firm doesn’t have any transparency into your trading activity in brokerage accounts that you may have at TD Ameritrade or at other financial institutions. Therefore, a trade placed in one account may inadvertently create a wash sale in another account. You should be aware of investments in all your investment accounts to determine if you run the risk of violating the wash sale rule.
There are a couple other potential advantages to tax-loss harvesting. Just as the farmer—who has a limited amount of resources in the form of land—needs to make sure resources are allocated properly to the crops that are performing optimally, an investor may want to consider culling unfavorable positions in a portfolio to potentially free up resources for optimal allocation.
Strategic tax-loss harvesting can help make your portfolio more efficient and potentially improve your after-tax returns. Just remember, as with any tax-related questions, you should talk to your tax professional, who can advise you on what’s appropriate for your specific tax situation.
Qualified clients can enroll by contacting a TD Ameritrade Investment Management Portfolios Specialist.
Once enrolled, TD Ameritrade Investment Management manages the process so you don’t have to. At any point, you can turn off the feature if you no longer desire it.
For more information about the TD Ameritrade Investment Management tax-loss harvesting service, contact a Portfolios Specialist at 800-665-1978.
Learn more by watching the short video below.
TD Ameritrade Investment Management does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances as to whether our TD Ameritrade Investment Management, LLC tax-loss harvesting feature is appropriate for you. This feature generally would be more beneficial to investors in higher tax brackets and high-tax states.
TD Ameritrade Investment Management, LLC goes through a rigorous due diligence process to select securities to replace those sold for tax-loss harvesting purposes. We seek replacement securities that meet TD Ameritrade Investment Management’s high standards and keep your portfolio in line with its target allocation.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Before investing carefully consider the underlying funds’ objectives, risks, charges, and expenses. For a prospectus containing this and other important information about each fund, contact us at 888-310-7921. Please read the prospectus carefully before investing.
All investments involve risk, including loss of principal. Past performance does not guarantee future results. There is no assurance that the investment process will consistently lead to successful investing. Asset allocation and diversification do not eliminate the risk of experiencing investment losses.
ETFs can entail risks similar to direct stock ownership, including market, sector, or industry risks. Some ETFs may involve international risk, currency risk, commodity risk, and interest rate risk. Trading prices may not reflect the net asset value of the underlying securities.
TD Ameritrade Investment Management (“TDAIM”) does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances as to whether the TDAIM tax-loss harvesting feature is appropriate for you. This feature generally would be more beneficial to investors in higher tax brackets and high-tax states.
The tax-loss harvesting feature is currently only available with the TDAIM ETF-based portfolios in taxable TD Ameritrade Investing Accounts. Tax-loss harvesting is not appropriate for all investors. Investing in securities involves risk of loss that the client should be prepared to bear. TDAIM does not represent or guarantee that the objectives of the tax-loss harvesting feature will be met. The performance of the replacement securities purchased through the TDAIM tax-loss harvesting feature may be better or worse than the performance of the securities that are sold for tax-loss harvesting purposes. TDAIM only reviews each account that is managed by it individually to help ensure that your account does not violate the “wash sale” rule. When you enroll in the tax-loss harvesting feature, the enrollment is on an account basis and does not apply to other TDAIM portfolios you may have. Each eligible TDAIM portfolio must be enrolled separately in the TLH feature. Accordingly, you are responsible for monitoring your brokerage accounts and your spouse’s brokerage accounts at TD Ameritrade or elsewhere to ensure that transactions in the same security or a substantially similar security do not create a wash sale. The wash sale rule postpones losses on a sale, if replacement shares are bought around the same time.
Prior to enrolling in the tax-loss harvesting feature, please read TDAIM’s white paper.
Advisory services are provided by TD Ameritrade Investment Management, LLC (“TD Ameritrade Investment Management”), a registered investment advisor. Brokerage services provided by TD Ameritrade, Inc. TD Ameritrade Investment Management provides discretionary advisory services for a fee. Risks applicable to any portfolio are those associated with its underlying securities. For more information, please see the Disclosure Brochure (Form ADV Part 2A).
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2019 TD Ameritrade.