What Is Tax-Loss Harvesting (Optimized at the Individual Equities Level)?

When you have a portfolio of stocks, naturally some will increase in value and some will lose value over the course of a year. Tax-Loss Harvesting (TLH) is a process of reducing your near-term tax burden by selling assets that have lost value in the past year. These losses can be used to offset capital gains in other investments, or to reduce your taxable income. While using losses to offset income is capped at $3,000 per year, losses in one year can be carried forward indefinitely to offset income in future years. You will have to pay the tax in the future but TLH puts more money in your pocket now that can be invested to generate returns which can compound for you in the meantime until you choose to sell the investment and face capital gains taxes at that time.

Many advisers offer tax-loss harvesting, but if they are using funds (such as ETFs or mutual funds), the opportunity to generate this advantage is limited. Our approach is to offer TLH at the individual equities level which results in more opportunities for tax optimization. We can do this because OpenInvest’s technology bypasses fund managers and gives you direct ownership of the underlying companies.

Wealthfront, who offers this feature only for accounts with more than $100,000, estimates that this approach can generate an average of 2.03% additional gains per year. However, because “tax alpha” is so variable (e.g. Wealthfront picks very specific years from which to present this data) we are more conservative in our claims – TLH opportunities are not always available or successful.

Though not as critical as keeping fees low, holding a diversified portfolio or selecting an appropriate risk tolerance, TLH is an important consideration in selecting an investment advisor and it can have a significant impact on your long-term performance.

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