Finding silver linings with tax-loss harvesting

• Tax-loss harvesting strategies can be used to realize losses in single stocks, bonds, mutual funds, and ETFs in a taxable account. Investors can sell assets at a loss, then use realized losses to offset realized capital gains as well as ordinary income.¹
• You can’t control investment returns but you can help control how much your clients’ are paying in taxes. With 100% of Core and Core-Plus Bond funds facing an average negative price return of over 20% for the 3-year period,² the biggest opportunity this Q4 could be tax-loss harvesting in fixed income.
• BlackRock offers the tools to keep your clients invested. The Tax Evaluator can help you identify tax-loss harvesting opportunities, monitor taxable distributions and find replacement investment ideas.

Markets have been roiled over the past few years, as persistent inflation and rising rates have spooked investors. The pain has been widespread - since the beginning of 2022, U.S. stocks and bonds have posted losses, with bonds down double digits.³ Since 2005, there have only been 10 instances where both stocks and bonds have posted losses over a 20-month period – and all have occurred in the past year.⁴

It can be difficult for clients to want to stay invested while markets whipsaw, and to learn the bitter truth that markets don’t always deliver outsized, orderly returns. Today 100% of Core and Core-Plus Bond fund price returns are negative for the 3- and 5-year periods, with the average fund down over 20%.² But it’s not all doom and gloom. Taxes are one of the few factors in a portfolio that advisors can seek control over, whereas pretax returns are among the hardest to predict. This year presents a huge opportunity to tax-loss harvest those losses and offset gains today to help lower clients’ 2023 taxes. Advisors can help clients keep their short-term goals in sight, while taking steps to mitigate some of the short-term pain of declining investments.

Tax-loss harvesting is a strategy in which investors can sell investments at a loss to offset capital gains elsewhere, potentially reducing taxes owed, or help offset up to $3k per year in ordinary income. Investors may use sales proceeds to either buy similar investments to maintain current portfolio objectives, or they can use the opportunity to shift to an investment with a different goal.

The critical insight that can unlock tax-loss harvesting opportunities is that gains and losses are based on the investment’s price return, not its total return. In the case of bond funds, they tend to distribute the bulk of their return in income distributions, pushing their price return usually well below their total return.

Fund standardized performance usually reports only total return, but BlackRock's Tax Evaluator shows the price returns of all of the positions in your portfolio. Given the drawdowns in both bonds and stocks this year, investors have an unprecedented opportunity to reset and modernize portfolios with potentially higher conviction investments.

Be aware that rules preclude investors from recognizing losses and then quickly buying back their original investment or a substantially identical one. These “wash sale” restrictions mandate that an investor cannot realize a loss on the sale of an investment and then buy a “substantially identical” security, beginning 30 days before and ending 30 days after a security sale.⁵ Depending on the specific securities involved, executing a tax-loss harvesting strategy and reinvesting can be accomplished with ETFs or mutual funds.

BlackRock can help you identify areas to tax-loss harvest across your 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 and 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 maintain good portfolio hygiene while keeping your clients invested. While current market volatility may get your clients’ portfolios down, tax-loss harvesting can add value back to potentially finish 2023 strong.