Finding Silver Linings With Tax-Loss Harvesting
Both stocks and bonds are down this year, presenting investors with a rare opportunity to rebalance their portfolios
As persistent inflation and rising rates continue to disrupt markets, the pain has been widespread: U.S. stocks are off to their third-worst start – and bonds their worst start ever – dating all the way back to 1926.1
Although it can be difficult for clients to want to stay invested after the massive returns we saw in 2021, the old saying still goes that “what seems like a curse may be a blessing.” With tax-loss harvesting, financial advisors can help clients keep their long-term goals in sight, while taking steps to mitigate some of the short-term pain of seeing their investments decline.
Help your clients end the year stronger
Tax-loss harvesting is the act of selling an investment below its purchase price to realize a loss in a taxable account. Investors may use sales proceeds to either buy similar investments to maintain current portfolio exposures, or use the opportunity to lean into higher conviction strategies.
Given the drawdowns in both equities and bonds – this is the fourth-worst start for U.S. stocks year-to-date2 – financial advisors have an unprecedented opportunity to provide value to their clients in a down year.
Selling single stocks or individual bonds at a loss and reinvesting in ETFs or mutual funds may avoid violating wash sale rules while helping clients stay invested. To be sure, tax-loss harvesting opportunities are plentiful; many formerly high-flying stocks have fallen considerably, some of them as much as 50% year-to-date.3 Similarly, investors can consider selling out of individual bonds and buying diversified fixed income ETFs or mutual funds as a way to realize losses.
Tax-loss harvesting can also apply to funds. Currently, 99% of intermediate bond mutual funds4 and 96% of U.S. equity mutual funds have a negative price return over a 1-year period5. With many indexes underwater, this provides advisors with a once-in-a-generation opportunity to tax-loss harvest across their entire portfolio6 – saving clients tax money and helping them to stay invested at the same time.
BlackRock can help financial professionals identify areas to tax-loss harvest across a client’s portfolio. Upload your portfolio to BlackRock’s Tax Evaluator tool to see price return data for your funds, uncover potential tax-loss harvesting opportunities & discover replacement ideas. The Tax Evaluator tool also allows you to keep track of estimated capital gains and analyze performance and fees for your investments, helping you achieve more favorable after-tax results and to help keep your clients invested. While current market volatility may get your clients’ portfolios down, tax-loss harvesting can add value back to finish 2022 stronger.
1 Source: Morningstar as of 6/30/22. U.S. bonds represented by the IA SBBI US Gov IT Index from 1/1/26 to 1/3/89 and the Bloomberg U.S. Agg Bond TR Index from 1/3/89 to 6/30/22. U.S. stocks are represented by the S&P 500 Index from 3/4/57 to 6/30/22 and the IA SBBI U.S. Lrg Stock Tr USD Index from 1/1/26 to 3/4/57, unmanaged indexes that are generally considered representative of the U.S. stock market during each given time period. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
2 Source: Morningstar as of 9/30/22. U.S. bonds represented by the IA SBBI US Gov IT Index from 1/1/26 to 1/3/89 and the Bloomberg U.S. Agg Bond TR Index from 1/3/89 to 9/30/22. U.S. stocks are represented by the S&P 500 Index from 3/4/57 to 9/30/22 and the IA SBBI U.S. Lrg Stock Tr USD Index from 1/1/26 to 3/4/57, unmanaged indexes that are generally considered representative of the U.S. stock market during each given time period.
3 Source: Morningstar Direct, as of May 30th, 2022. U.S stock market refers to the S&P 500. U.S. bonds refers to the Bloomberg U.S. Aggregate Bond Index. The Bloomberg U.S. Aggregate Bond lost 12.74% from August 1, 1979 to Feb. 29, 1980 and 11.08% from August 2020 to April 30, 2022.
4 Source: Morningstar, as of 7/31.22. 100% of mutual funds in the intermediate core bond category have a negative price return on the 1 and 3 year. 100% and 96% of mutual funds in the intermediate core plus bond category have a negative price return on the 1 and 3 year, respectively.
5 Source: Morningstar, as of 7/31/22. Based on all equity mutual funds in the US with a 3-year track record. Past performance does not guarantee or indicate future results.
6 Source: Morningstar as of 6/30/22. 2022 is the third worst year for stocks and the worst year for bonds since 1926. U.S. bonds represented by the IA SBBI US Gov IT Index from 1/1/26 to 1/3/89 and the Bloomberg U.S. Agg Bond TR Index from 1/3/89 to 6/30/22. U.S. stocks are represented by the S&P 500 Index from 3/4/57 to 6/30/22 and the IA SBBI U.S. Lrg Stock Tr USD Index from 1/1/26 to 3/4/57, unmanaged indexes that are generally considered representative of the U.S. stock market during each given time period.
CAREFULLY CONSIDER THE FUNDS’ INVESTMENT OBJECTIVES, RISK FACTORS, AND CHARGES AND EXPENSES BEFORE INVESTING. THIS AND OTHER INFORMATION CAN BE FOUND IN THE FUNDS’ PROSPECTUSES OR, IF AVAILABLE, THE SUMMARY PROSPECTUSES WHICH MAY BE OBTAINED BY VISITING WWW.iSHARES.COM OR WWW.BLACKROCK.COM. READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
INVESTING INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
Transactions in shares of ETFs may result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders.
Investment comparisons are for illustrative purposes only. To better understand the similarities and differences between investments, including investment objectives, risks, fees and expenses, it is important to read the products prospectuses.
The Internal Revenue Service has not released a definitive opinion regarding the definition of “substantially identical” securities and its application to the wash sale rule and ETFs. The information and examples provided are not intended to be a complete analysis of every material fact respecting tax strategy and are presented for educational and illustrative purposes only. Tax consequences will vary by individual taxpayer and individuals must carefully evaluate their tax position before engaging in any tax strategy.
No proprietary technology or asset allocation model is a guarantee against loss of principal. There can be no assurance that an investment strategy based on the tools will be successful.
This material is provided for educational purposes only and is not intended to constitute investment advice or an investment recommendation within the meaning of federal, state or local law. You are solely responsible for evaluating and acting upon the education and information contained in this material. BlackRock will not be liable for direct or incidental loss resulting from applying any of the information obtained from these materials or from any other source mentioned. BlackRock does not render any legal, tax or accounting advice and the education and information contained in this material should not be construed as such. Please consult with a qualified professional for these types of advice.
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