Tax-loss harvesting can be a useful tool for investors when a portfolio experiences capital loss. Several market segments have produced negative returns in 2024, creating tax-loss harvesting opportunities.
Investors may be holding onto investments that have not generated attractive returns. Understandably, no one wants to lose money on an investment; however, these losses can potentially help reduce one’s tax bill.
Tax-loss harvesting involves selling investments at a loss. The investor then uses capital losses to offset capital gains and/or ordinary income. If losses exceed gains or only losses are incurred, up to $3,000 can be used to offset ordinary income in the current year. Additionally, any amount above $3,000 can be carried forward for use in future years.
Finally, the investor must use the money from the sale to replace the investment. Investors can either maintain the portfolio’s existing asset allocation or invest in a new area.
By selling an underperforming investment, cash is now available to invest in something else. However, it’s important to note the wash sale rule, which prohibits investors from buying a “substantially identical” investment within 30 days of claiming a loss on the sale of an investment (before or after).
However, an ETF may hold enough securities to pass the test of not being “substantially identical” to the previous investment. Because there are many nuances, it’s important to consult a tax professional for guidance.
2024 Tax-Loss Harvesting Opportunities
Several market segments have produced negative returns this year, creating an opportunity for tax-loss harvesting.
These include U.S. ETFs focused on China, energy equities, as well as broad-basket commodities. Additionally, fixed income ETFs focused on emerging markets bonds, core national municipal bonds, and intermediate core-plus bonds may have also seen losses this year.
For the core national municipal bonds category, for example, Invesco National AMT-Free Municipal Bond ETF (PZA ) may be a compelling tax-loss harvesting replacement. Investors harvesting losses in intermediate core-plus bonds might be interested in the Invesco Total Return Bond ETF (GTO ).
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