Volatility is back with a vengeance, and as a result, so is tax-loss harvesting. While many think this tax-smart strategy is only a fourth quarter move, with stocks whipsawing between up and down days throughout the year, Charles Schwab‘s David Koenig, chief investment strategist for Schwab Intelligent Portfolios, said there are lots of opportunities to pair winning stocks with losing ones to offset capital gains outside of the end of the year.
“It’s really designed to take advantage of the natural volatility in the market throughout the year,” said Koenig in an interview with Investopedia. In 2017, when volatility was low and stocks were setting new highs seemingly every month, there were fewer opportunities to engage in tax-loss harvesting. But with volatility rising in 2018, the ability to implement this tax savings strategy has increased. “In early February, around the time of the correction, the number of tax-loss harvesting trades made for clients jumped significantly,” said Koenig. “That said, we also had tax-loss harvesting trades for clients in 2017 and every month since 2015. Periods of higher volatility present more opportunity.”
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When it comes to tax-loss harvesting, there are rules that investors have to be aware of such as the wash sale rule. Under Internal Revenue Service guidelines, investors can’t claim a tax loss on a stock they sold and then repurchased within 30 days. The IRS looks at all of the investor’s holdings to determine if he or she broke the rule, and if it finds that one stock sale/purchase did so, it will be disallowed. Furthermore, while it can be easy to spot winners and losers in stock portfolios, it can get tougher to identify those opportunities for ETF investors.
To aid in that and to prevent clients from running afoul of the wash sale rule, the Schwab Intelligent Portfolio will do the work for clients, using algorithms that automatically check every portfolio each day for rebalancing and tax-loss harvesting opportunities. Take a large-cap U.S. stock exchange-traded fund (ETF) as an example. If that ETF has a big enough decline, it will be sold off to offset any capital gains for the year. To prevent the client from losing exposure to large-cap U.S. stocks during the 30 days that the IRS doesn’t allow repurchase of that same ETF, Schwab Intelligent Portfolio will invest in another ETF that gives the client the same exposure but doesn’t run afoul of the wash sale rules.
“It’s a great feature for taxable account clients,” said the executive from The Charles Schwab Corporation (SCHW). “It’s a strategy that hasn’t been readily available to individual investors in the past.”