TaxesMarch 8, 2015

    Tax-loss harvesting may allow you to offset taxable investment gains with taxable investment losses, lowering your tax bill and leaving you with more money to invest and potentially grow. Over time, it is possible tax-loss harvesting will help your portfolio (see "Important Disclosures"). But it's a complicated and time-consuming practice for an ordinary investor with a day job. If you have a Schwab Intelligent Portfolios™ account with invested assets of $50,000 or more, you can enroll in automated tax-loss harvesting for ETFs in this account and have it done for you.

    Here's how it works. You pay taxes on your taxable investments which are sold at a gain—that is, short-term capital gains on securities held a year or less, and long-term gains on securities held more than a year. From a tax perspective, short-term gains are the least desirable because they're taxed at a higher rate—up to 43.4% at the federal level. Long-term gains top out at 23.8%.

    Let's say you have some taxable investments in your portfolio that haven't done so well, and are worth less now than when you bought them. You could hang onto them in the hopes that they'll recover—which may never happen—or you can sell them at a loss and generally subtract that loss from the gains you recognized on other taxable investments during the course of the year.

    If you end up with more investment losses than gains, here's the extra benefit. Those capital losses may reduce your capital gains and may also reduce your ordinary income by up to $3000 per year ($1,500 each for spouses filing separately). If such losses are not fully utilized in the year they occur, the excess may be carried forward into subsequent tax years.

    So why doesn't everyone take advantage of tax-loss harvesting? A few reasons:

    • It can be complicated to identify good tax-loss harvesting candidates. Some taxable investments only dip in value briefly, leaving only a very small window of opportunity to harvest a tax loss.
    • You should still maintain your target asset allocation. Suppose you want to exit a position but maintain your exposure to a particular asset class: You'll need to find an alternative security that isn't "substantially identical" in the eyes of the IRS (at least for 30 days before and after the sale, lest you run afoul of the wash-sale rule), which would defer or disallow the loss.
    • The so-called netting rules around which losses count against which gains, and in what order, are extensive and arcane. 

    In other words, tax-loss harvesting is a generally beneficial activity that requires patience, time, attention to detail and math. Not up for it? You don't have to be. It's offered in Schwab Intelligent Portfolios.

    The tax-loss harvesting feature that will be available with Schwab Intelligent Portfolios™ is subject to significant limitations which are described on the Schwab Intelligent Portfolios website and mobile application (collectively, the "Website") as well as in the Schwab Wealth Investment Advisory, Inc. Schwab Intelligent Portfolios Disclosure Brochure (the "Brochure"), and the IRS website at www.irs.gov. You should consider whether or not to enroll in tax-loss harvesting based on your particular circumstances and the potential impact tax-loss harvesting may have on your tax return.

    You should read the tax-loss harvesting disclosures on the Website and in the Brochure before choosing the tax-loss harvesting feature if you decide to enroll in Schwab Intelligent Portfolios™. Neither the tax-loss harvesting strategy for the Schwab Intelligent Portfolios program, nor any discussion herein or on Website or Brochure is intended as tax advice, and neither Charles Schwab & Co. Inc. or its affiliates, including but not limited to, Schwab Wealth Investment Advisory, Inc. nor Charles Schwab Investment Advisory, Inc. represents that any particular tax consequences will be obtained.

    Schwab Wealth Investment Advisory, Inc. does not provide legal, tax or accounting advice. Where specific advice is necessary or appropriate, SWIA recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

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