Global stocks and bonds are both down on the year1 and volatility is still elevated — but broad losses offer big opportunities for tax-loss harvesting. Learn more.
Know Tax-Loss Harvesting Rules
What is Tax-Loss Harvesting?
Harvesting losses means selling investments in taxable accounts that have lost value to offset capital gains elsewhere and help reduce taxes owed.
What Happens When You Sell a Position That Has Lost Value?
The loss offsets capital gains from selling securities at a profit during the year, as well as annual capital gain distributions of mutual funds.
If capital losses exceed gains at year-end (or if there are no gains), losses can offset up to $3,000 in non-investment income, even though it is often taxed at a higher rate than capital gains.
You can carry forward losses above $3,000 to offset capital gains and ordinary income over your lifetime.
What is the Wash-Sale rule?
The Internal Revenue Service’s Wash-Sale Rule prohibits claiming a loss on the sale of an investment if the same or “substantially identical” investment is purchased either 30 days before or after the sale date.
A “tax swap” can serve as a placeholder to maintain exposure to the asset class for 30 days. After 30 days, you can decide whether to switch back to the original holding.
How to Use Tax Swaps
Tax swaps enable you to invest proceeds from the sale of losing position in a more permanent way to lower costs or target new markets.
Lower Your Costs
Expense ratios for SPDR Portfolio ETFs are 93% lower than the median US-listed mutual fund.3 Replacing higher-fee mutual funds with low-cost core equity and bond ETFs may help you build more cost-efficient portfolios.
Is ESG a priority? There are more ESG ETFs than ever to support broad market exposures. You can build a more ESG-centric portfolio by harvesting losses in traditional core holdings and swapping them for ESG ETFs.
The time to harvest losses is when losses occur. Investments that are down early in the year could bounce back into positive territory — resulting in missed opportunities to sell losers and book losses to offset gains.
To get maximum value from harvesting losses, take a long-term view of the asset and your needs when making decisions and consider:
If a loss is less than $2,000, transaction and tracking costs may erode tax savings.
The longer you plan to hold the asset, the greater the chance that the tax savings you’ve re-invested will grow.
If an asset will be left to heirs, there’s less need to measure the value of harvesting a current loss against future taxes due should the asset appreciate. Because heirs receive a step-up in basis, growth doesn’t turn into a future tax liability.
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1 Bloomberg Finance L.P., as of 08/23/2022. Global stocks and bonds represented as the MSCI World and Bloomberg Global Aggregate, respectively. Both global stocks and bonds have lost 14% year to date. Past performance is not an indicator of future performance. It is not possible to directly invest in an index. 2 Morningstar, State Street Global Advisors, as of 07/31/2022. The median expense ratio of the 22 SPDR Portfolio ETFs compared to the median expense ratio of oldest share class US domiciled mutual funds of similar Morningstar Categories, which includes active and passive funds. The median expense ratio of oldest share class passive US domiciled mutual funds of similar Morningstar Categories is 0.17%. SPDR Portfolio ETFs are 74% lower than the average passive US domiciled mutual fund.
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