"Tax-Loss Harvesting" Feature
Clients may request Charles Schwab & Co., Inc. ("Schwab") (and Charles Schwab Investment Management, Inc. ("CSIM") through Schwab) to employ a tax-loss harvesting strategy with any taxable account; however, the account must meet the minimum balance requirement of $50,000 for the tax-loss harvesting strategy to become active on the account. There is also a lower minimum balance requirement to maintain a tax-loss harvesting strategy; for any accounts falling below this minimum balance, the tax-loss harvesting strategy will become inactive until such time as the minimum balance requirement is met. These minimums are designed to limit, but cannot always prevent, scenarios where tax-loss harvesting sales are made and a single share of the replacement ETF is too expensive to purchase. As a result, a portion of the proceeds from the sale of the ETF could remain in cash, rather than being used to purchase a replacement ETF.
The Rebalancing Algorithms
1 are designed to conduct a daily review of client accounts for tax-loss harvesting opportunities. When the tax-loss harvesting threshold is met, the Rebalancing Algorithms are designed to initiate a tax-loss harvesting trade order for accounts in the Schwab Intelligent Portfolios® program and Schwab Intelligent Portfolios Premium® (collectively, the "Programs") unless there are currently restrictions within the asset class, such as to avoid wash sales
2. During this process, certain ETFs in the client's account are sold at a loss to offset potential capital gains (although CSIM does not monitor the type and amount of capital gains). If the tax-loss harvesting sale causes the asset class to become underweight, the Rebalancing Algorithms can recommend a buy order to replace the ETFs sold for tax-loss harvesting purposes with the ETF(s) that CSIM reasonably believes are not substantially similar based upon different ETF indices used by each ETF.
When CSIM sells an ETF to harvest a tax loss, and purchases another ETF to replace it, CSIM will generally be unable to sell the replacement ETF for 30 days, even if it could sell the ETF at a gain and not cause a wash sale. If an account needs to be rebalanced in that 30-day period, CSIM will generally not be able to sell the replacement ETF as part of that rebalancing. As a result, the account may not be allocated according to the chosen investment strategy until the 30-day period has expired, which could affect its performance.
If a client has two or more Program accounts that are being monitored together to avoid the wash sale disallowance rule, and the accounts hold different ETFs in the same asset class, if the Rebalancing Algorithms recommend selling ETFs in that asset class to harvest tax losses, the Rebalancing Algorithms will choose to do so in the earliest-enrolled account and skip the other account(s), and therefore do not prioritize selling the ETF that will generate the greatest tax loss.
The performance of the replacement ETFs may be better or worse than the performance of the ETFs that are sold for tax-loss harvesting purposes. The utilization of losses harvested through tax loss harvesting will depend upon the recognition of capital gains in the same or a future tax period, and in addition may be subject to limitations under applicable tax laws.
The effectiveness of the tax-loss harvesting strategy to reduce the tax liability of the client will depend on the client's entire tax and investment profile, including purchases and dispositions in a client's (or client's spouse's) accounts outside of the Programs and type of investments (e.g., taxable or non-taxable) or holding period (e.g., short-term or long-term). The tax-loss harvesting strategy is not designed to ensure that it will reduce, defer, or eliminate the tax liability generated by a client's investment portfolio in any given tax year. The Rebalancing Algorithms only monitor accounts enrolled in the Programs to determine if there are unrealized losses for purposes of determining whether to harvest such losses. Transactions in accounts not enrolled in the Programs may affect whether a loss is successfully harvested and, if so, whether that loss is usable by the client in the most efficient manner.
Wash Sale Avoidance
A wash sale is the sale at a loss of a security (such as an ETF) and the purchase of the same or a substantially similar security within 30 calendar days either before or after that sale. If a wash sale occurs, the IRS may disallow or defer the loss for current tax reporting purposes. In an effort to avoid wash sales, in certain circumstances, the Rebalancing Algorithms will prevent rebalancing and tax loss harvesting transactions from occurring. In those cases, the Rebalancing Algorithms could be unable to rebalance towards the target allocation for 30 or more days, which can impact performance. This can also result in not utilizing all tax loss harvesting opportunities.
CSIM will seek to avoid wash sales in any Schwab Intelligent Portfolios® ("SIP") or Schwab Intelligent Portfolios Premium® ("SIP Premium") account(s) associated with the same primary account holder (with the exception of custodial or trust accounts). If CSIM is monitoring multiple accounts to avoid the wash sale disallowance rule, the first taxable account to sell an ETF at a loss will block the other account(s) from buying in that same ETF for 30 days. Similarly, the first account to buy an ETF will block the other taxable accounts from selling that same ETF at a loss for 30 days.
Although the Rebalancing Algorithms seek to avoid wash sales, they are not designed to and cannot avoid all wash sales.
For instance, in the event that securities need to be sold in order to enable withdrawals, such as for withdrawals made through Schwab Intelligent Income®
3, those sales will take place even if they could result in wash sales. If a client sells ETF shares at a loss and uses the proceeds to fund their Program account or other account, CSIM may purchase the same ETF shares for their Program account within 30 days, thereby creating a wash sale. CSIM only monitors for wash sale avoidance for accounts enrolled in the Programs, and clients are responsible for monitoring their and their spouse's other accounts (at Schwab or with another firm) to ensure that transactions in the same ETF or a substantially similar security do not create a wash sale.
You should consult with your professional tax advisors or check on the IRS website at
www.irs.gov about the consequences of tax-loss harvesting in light of your particular circumstances and its impact on your tax return. Neither the tax-loss harvesting strategy for the Programs, nor any discussion herein, is intended as tax advice, and neither Schwab nor CSIM represents that any particular tax consequences will be obtained.
- The Rebalancing Algorithms are designed to conduct a daily review of client accounts for rebalancing opportunities. If the allocation of the ETFs in a client's account deviates by more than an amount specified in Schwab's parameters from the recommended asset allocation due to changes in ETF values, the Rebalancing Algorithms will initiate a rebalancing trade order unless CSIM exercises discretion to not do so for reasons such as market volatility or under certain circumstances such as those described above for tax loss harvesting and wash sale avoidance.
- A wash sale is the sale at a loss of a security (such as an ETF) and the purchase of the same or a substantially similar security within 30 calendar days either before or after that sale. If a wash sale occurs, the IRS may disallow or defer the loss for current tax reporting purposes.
- Schwab Intelligent Income ("SII") is an optional feature available to SIP and SIP Premium clients who would like to enable recurring withdrawals from their accounts over a specified time period to meet ongoing income needs. The SII feature is not a portfolio strategy. SII is designed to meet income needs through recurring withdrawals and not by generating or harvesting interest and dividends from investments in your SIP or SIP Premium accounts.
(0324-4CYW)
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