It’s Tax-Loss Harvesting Season

by:
Portfolio Strategist, MainStay Investments

Tax Efficiency May Help Achieve Long-Term Goals

  • Tax-loss harvesting is the strategic selling of one or more depreciated assets to offset taxes on the gains created by the sale of one or more appreciated assets.
  • To maintain the same asset allocation exposures, an investor simply replaces a depreciated asset with another highly correlated investment, typically an ETF or a mutual fund.
  • The benefits of tax-loss harvesting depend on an investor’s unique circumstances, but it may help offset unavoidable taxes owed, due to capital gains.
  • Another approach is to defer paying taxes on the gains until retirement, when many investors face a lower tax bracket.

Harvesting Losses to Manage Tax Ramifications

As it stands, the S&P 500 is up 15% year-to-date, and market volatility is fleeting. In this environment, a loss on an investment can be particularly painful, but there may be an upside. Price declines or losses often present investors with an opportunity to harvest losses.

Tax-loss harvesting is a strategy whereby an investor sells one or more depreciated assets to offset gains created by the sale of one or more appreciated assets. When harvesting losses, it is important to be mindful of the Wash-Sale Rule, which prohibits a taxpayer from claiming a loss when selling a security and within 30 days before or after this sale, buying a “substantially identical” security or an option to do so.

The Role of ETFs

Buying and selling the same stock would be a clear violation of the Wash-Sale Rule, whereas buying and selling different actively managed mutual funds within the same category is generally considered a more conservative approach. In the case of exchange-traded funds (ETFs), the IRS has not issued guidance regarding buying and selling ETFs from different issuers whose ETFs use the same underlying index. However, a more conservative approach would be to purchase an ETF using a correlated, but totally different, underlying index; for example, using a Financial Times Stock Exchange (FTSE) Index to replace a position using a Morgan Stanley Capital International (MSCI) Index, or vice versa.

It is also possible to harvest losses on individual names to some extent, given the diverse spectrum of asset class coverage offered by ETFs. For instance, assume an investor sells shares of an underperforming Natural Resources stock at a loss, but wants to maintain similar exposure to the asset class. An investor can simply sell that stock and utilize the proceeds to purchase an ETF that tracks the broader Natural Resources sector.

Conclusion

Taxes are a year-round consideration. Don’t wait until April to address tax-related issues—there are steps you can take now, with the help of your tax advisor, to prepare for tax concerns looking ahead. As such, one should seek professional investment and tax advice regarding tax-loss harvesting strategies.

Three Steps You Can Take

  1. Review your portfolio for tax-loss harvesting opportunities.
  2. Be mindful of the Wash-Sale Rule.
  3. Consider a conservative approach to assure the investments selected are not “substantially identical”.

Wash-Sale Rule

Care should be taken to determine whether, and to what extent, the Wash-Sale Rule might apply in each case. The IRS has not opined, for example, on whether, and to what extent, the Wash-Sale Rule might apply where a taxpayer acquires ETF shares within 30 days of the sale at a loss of a security that may be held by the ETF. Each client should consult his or her tax advisor to determine whether, and to what extent, the Wash-Sale Rule and other tax rules, including the “economic substance” penalties, might apply before pursuing a tax-loss harvesting strategy.

Tax-loss harvesting uses investment losses to help improve long-term after-tax returns.

Losses are harvested and used to offset realized gains–gains which would otherwise result in taxes owed.

If losses are left over, they can be used to offset up to $3,000 in ordinary income. Any remaining loss can generally be carried forward.

Wash-Sale Rule prohibits a taxpayer from claiming a loss when selling a security, and within 30 days before or after this sale, buying a “substantially identical” security or an option to do so.

Important tax information

This material includes a discussion of one or more tax-related subjects. This tax-related discussion was prepared to assist in the promotion or marketing of the transactions or matters addressed in this material. It is not intended (and cannot be used by any taxpayer) for the purpose of avoiding any IRS penalties that may be imposed upon the taxpayer. Taxpayers should always seek and rely on the advice of their own independent tax professionals. Please understand that New York Life & MainStay Investments and their affiliates and employees may not provide legal or tax advice.

An investor should consider any fees and charges that may apply when selling a fund for tax-loss harvesting purposes.

About risk

All investments are subject to risk and will fluctuate in value. All ETFs are subject to market risk, including possible loss of principal.

Consider the Funds’ investment objectives, risks, and charges and expenses carefully before investing. The prospectus and the statement of additional information include this and other relevant information about the Funds and are available by visiting IQetfs.com or calling 888-474-7725. Read the prospectus carefully before investing.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs and IQ Hedge Multi-Strategy Plus Fund. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Robert Serenbetz

Portfolio Strategist, MainStay Investments

Robert Serenbetz is the Portfolio Strategist for Strategic Asset Allocation and Solutions Group (SAS). He contributes to investment thought leadership and communication efforts across New York Life Investment Management

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