What is Tax-Loss Harvesting?
Tax-Loss Harvesting - often referred to as TLH - is an automated strategy designed to help improve your portfolio's after-tax returns. It works by selling individual stocks in your portfolio that have experienced a loss to realize that loss, which can then be used to offset capital gains taxes on other investments.
With an ETF or Mutual Fund, you can only harvest a loss if the entire ETF or Mutual Fund is down. If an ETF tracking the S&P 500® is up 10% for the year, you have no losses to harvest, even if some stocks within the index are down significantly.
With Direct Indexing, you own each stock individually. This allows the system to sell specific losing stocks to generate a tax loss, even when the overall market is performing well. The proceeds from that sale are reinvested into other stocks within the index you are tracking.
How is Tax Harvesting Enabled?
TLH is automatically activated on any Direct Index that has a rebalancing frequency set to Daily, Monthly, Quarterly, or Yearly. TLH will begin taking place 14 days after the creation of your Direct Index.
If your rebalance frequency is set to the "Buy and Hold" Setting, tax-loss harvesting is disabled. Any cash inflow or outflow will solely be used to get your account to mimic the index as closely as possible.
How does Tax Harvesting work?
If TLH is enabled, then whenever your account rebalances or experiences a cash inflow/outflow, we buy and sell assets in your Index in a way that aims to keep your Direct Index’s overall performance aligned with the index you selected, while also looking for opportunities to lower your taxes by harvesting losses. When an opportunity arises, our system sells stocks that have decreased in value and uses the proceeds to purchase another similar stock from the index to keep the overall performance of your portfolio aligned with its benchmark index. The opportunity to harvest losses is balanced against the goal of closely tracking the index's performance.
Important note: To create opportunities for harvesting, the system may not hold all the target stocks at once. For example, a 100-stock portfolio might only hold 80 positions at a given time, allowing flexibility to buy into the other 20 when a loss is harvested in one of the original 80.
What does this mean for my personal taxes?
Tax questions and responsibilities can be quite complex. Always consult your tax advisor or professional should you have any tax-related questions.
Additionally, it’s important to note that while TLH takes into consideration wash sales within your Direct Index, it does not look at wash sales across your other accounts, including your other Direct Index and brokerage accounts at Public and any other accounts outside of Public.
Any reference to securities, indexes, or strategies in this communication is for informational and illustrative purposes only, and should not be construed as investment or tax advice.
Investment advisory services for Direct Index Accounts (“DI Accounts”) are provided by Public Advisors LLC, an SEC-registered investment adviser, and brokerage services are provided by Open to the Public Investing, Inc., member FINRA / SIPC. Public Advisors and Public Investing are affiliates, and both charge fees for their respective services. Before investing, consider your investment objectives, all fees and expenses, and any potential conflicts of interest. For more details, see Public Advisors’ Firm Brochure, Form CRS, and Fee Schedule.
Your DI Account’s composition and performance may deviate from the benchmark index due to tracking error, market conditions, the frequency of rebalancing and tax loss harvesting, and any portfolio customizations. Indexes are not available for direct investment; therefore, their performance does not reflect the expenses associated with management of a DI Account. See additional disclosures.
Tax-loss harvesting (“TLH”) occurs whenever your DI Account rebalances or experiences a cash inflow or outflow. In order to opt out of TLH, you must set your rebalancing schedule to “None.” The ability of TLH to reduce tax liability is not guaranteed and will depend on your entire tax and investment profile. The performance of replacement stocks purchased through TLH may be worse than the securities sold, and TLH may cause the composition and performance of your portfolio to deviate from the benchmark index. Learn more about additional TLH risks. Public Advisors does not provide tax advice or assume liability for tax consequences of client transactions.
Any S&P index (“S&P Index”) referenced in this communication is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”), and has been licensed for use by Public Holdings. S&P® and S&P 500® are trademarks of S&P Global, Inc. or its affiliates (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Public Holdings. Public Advisors’ Direct Indexing products are not sponsored or, sold by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of any S&P Index.