Save on taxes and have more money to invest
Capital gains taxes can drain away about 15% to 20% of your realized gains each year. Compounded over time, that could be a huge missed opportunity. Our advisors consider taxes from the moment you enroll. As we optimize your portfolio, we'll focus on strategies that work to maximize your after-tax returns. Tax-loss harvesting (TLH) is one way we can do that.
How does tax-loss harvesting work to help you optimize your portfolio?
See the power of automated TLH
Here's a breakdown of the average potential gains of using TLH at different frequencies.
Notes: Depicts the average TLH benefit—the difference in internal rate of returns of the baseline portfolio with and without TLH—for 15-year rolling periods, from the period starting in 1982 to the period starting in 2005 and concluding in 2019. The hypothetical portfolio is based on 400 securities contained in a risk model to create a market-cap-weighted index portfolio, similar to an S&P 500 or Russell 3000 Index portfolio. The frequency indicates how often the portfolio was scanned for harvesting opportunities, which were identified as tax lots with at least a 10% loss relative to cost basis. This analysis assumed quarterly cash flows of 5%, capital gains availability of 3% of the portfolio value, an eventual liquidation of 50%, a harvest tax rate of 40%, a liquidation tax rate of 25%, fund-level harvesting, and a relative transaction cost of 10 basis points. The model does not consider commissions, underlying product costs, or advisory fees.
Source: Vanguard calculations using data from Axioma.
How does tax-loss harvesting benefit you?
TLH benefits may fully offset the cost of Vanguard Personal Advisor SelectTM
Source: Vanguard's research-based model for estimating the benefit created by tax-loss harvesting. The tax-loss harvesting impact is calculated as the difference in internal rate of returns (IRR) of the baseline portfolio without tax-loss harvesting and the portfolio with tax-loss harvesting. The variables used to consider a large variety of investor profiles were levels of cash flows, realized capital gains, liquidation, and tax rates. The impact shown is the median benefit. In a high-volatility 15-year market environment the model's estimate ranged from 0.51% to 1.4% and during an average level of volatility, the estimate ranged from 0.08% to 0.83%.
0.30% is the fee for Personal Advisor Select and Personal Advisor Wealth Management.
Note: The figures above are hypothetical estimates and do not represent the TLH benefits actually received by any client of Personal Advisor Select. The actual TLH benefits that any client may receive are highly dependent upon their particular situation. This model provides a potentially strong case for tax-loss harvesting for investors with a net worth above the 90th percentile of $1.19 million.
How tax-loss harvesting can make a difference
Let's discuss two different scenarios for the same client, Kelly, and the resulting returns for one of her investments. In one, she agrees to use TLH, and in the other, she decides not to.
In 2021, Kelly and her husband were excited to enroll in Personal Advisor Select to help prepare for their upcoming retirement in 2025. As a longtime Vanguard investor, Kelly follows Vanguard's investment principles and is eager to find a way to protect her nest egg during periods of market volatility.
Kelly uses TLH
Her advisor discussed TLH as a particularly effective strategy, so she enrolled in the service despite being hesitant to sell any portion of her savings at a loss.
One of her investments decreased in value from $30,000 to $27,000. Selling the investment at a loss of $3,000 allowed her to save 30%—or $900—in ordinary income taxes. She reinvested the $27,000 proceeds and the additional $900 in tax savings for a total of $27,900. Over the years, the investment value doubled to $55,800. After she sold the investment and paid 15% in capital gains taxes—or $4,185—the net proceeds were $51,615.
Although she was initially hesitant, she now feels more assured after using TLH to take control back from volatile markets.
Kelly doesn't use TLH
Although she's a suitable candidate for TLH, Kelly wasn't convinced about selling any part of her savings at a loss. She didn't want to lose money after working so hard to build up her nest egg. The investment doubled from $27,000 to $54,000 over the years. After Kelly sold the investment and paid 15% in capital gains taxes—or $4,050—the net proceeds were $49,950. She could have saved $1,665 with TLH.
The chart below shows Kelly's investment returns with and without TLH for the investment in her portfolio that decreased in value.
Note: This example is for illustrative purposes only and does not consider any transaction costs, costs of the underlying investments, or the impact of advisory fees.
Kelly's investment returns with and without TLH
This is just for one of Kelly's investments. Personal Advisor Select's automated TLH scans Kelly's entire portfolio periodically or in accordance with our methodology, making her potential after-tax returns much greater if losses are harvested during periods of market volatility.
Note: This case study is based on a real client scenario that has been simplified for illustrative purposes. It does not represent any actual client quotes, results, or experiences.
In addition to TLH, here are some additional tax strategies an advisor can use:
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Frequently asked questions about tax-loss harvesting
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*On days your portfolio has rebalancing or other trading activity scheduled or in progress, we'll pause checking for tax-loss harvesting opportunities. Details on which Vanguard ETFs can be harvested will be available in the Tax-Loss Harvesting Addendum to your Service Agreement that you'll discuss with your advisor.
**By nature, tax-loss harvesting results in a lower cost basis for the investments you purchase with the sales proceeds, meaning more of your investment could be subject to taxes when you sell it later. So, it's most beneficial and appropriate if you think your tax rate will be lower in the future. If it's not, you may end up deferring the taxes owed but not ultimately reducing them.
***Vanguard, Tax-Loss Harvesting: A Portfolio and Wealth Planning Perspective (PDF) (Kevin Khang, Ph.D., et al., 2020).
††Note that when making other non-tax-loss-harvesting trades in your portfolio in order to align with our investment methodology, we may choose to cause a wash sale in certain circumstances.
†††Details on which Vanguard ETFs can be harvested or used as Vanguard Replacement ETFs will be available in the Tax-Loss Harvesting Addendum to your Service Agreement that you'll discuss with your advisor.
For more information about Vanguard mutual funds or ETFs, obtain a mutual fund or ETF prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free online) or through another broker (who may charge commissions). See the Vanguard Brokerage Services Commission and Fee Schedules on Vanguard.com for limits. Vanguard ETF Shares are not redeemable directly with the issuing Fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.
We recommend that you carefully review the terms of the Tax-Loss Harvesting Addendum to your Service Agreement and consult a tax advisor before enrolling in tax-loss harvesting in your advised accounts. We do not provide legal or tax advice, and none of the information provided on this webpage is intended as tax or legal advice.
All investing is subject to risk, including the possible loss of the money you invest.
Vanguard's advice services are provided by Vanguard Advisers, Inc. ("VAI"), a registered investment advisor, or by Vanguard National Trust Company ("VNTC"), a federally chartered, limited-purpose trust company.
The services provided to clients will vary based upon the service selected, including management, fees, eligibility, and access to an advisor. Find VAI's Form CRS and each program's advisory brochure here for an overview.
VAI and VNTC are subsidiaries of The Vanguard Group, Inc., and affiliates of Vanguard Marketing Corporation. Neither VAI, VNTC, nor its affiliates guarantee profits or protection from losses.