Save on taxes and have more to invest
Taxes can drain away about 9% of your returns every year. Compounded over time, that's a huge opportunity.*
Our advisors consider taxes every step of the way, from the moment you enroll. As we optimize your portfolio, we'll always choose strategies that attempt to get you the highest risk-adjusted after-tax return. Tax-loss harvesting is one way we can do that.
How does automatic tax-loss harvesting work?
Here’s a tax-loss harvesting example
1 Investor B will owe tax on a larger portion of the balance because tax-loss harvesting changes the cost basis of the investment and because they reinvested the tax savings in this example, leading to additional earnings.
Source: Vanguard.
Notes: This is a hypothetical illustration. Capital gains are assumed to be eligible for the current long-term capital gains treatment and taxed at a 20% rate. Investor B is assumed to offset ordinary income with the tax-loss harvesting transaction, which is taxed at a hypothetical 30% rate.
This line graph showing how each instance of tax-loss harvesting can make a meaningful difference in your long-term returns. Invest A and B both begin with $50k. Both lose 20% during a market downturn, leaving them with $40k. Investor B (who has tax-loss harvesting) sells the investment and buys a similar investment with the proceeds, then claims the loss on their tax return, lowering their taxes due by $3k. they use the savings to buy more of the investment, giving them $43k. Over time, both investors double the value of their investments, giving Investor A $80k and Investor B $86k. Both investors then sell their investments and pay capital gains tax, leaving Investor B with a higher balance of $77.4k, versus Investor A, who doesn't have tax-loss harvesting, with $74k.
Minimize your taxes with powerful tax strategies ...
When it comes to tax strategies through Vanguard Personal Advisor, tax-loss harvesting is just the beginning.
An advisor can help you with strategies to meet your individual situation based on the types of investments you own, your tax bracket, where you are in your investing life cycle, and your ultimate plans for your money.
Here are some additional tax strategies we can use:
- Where eligible, move your investments into the service "in kind" rather than selling them (which can trigger a large tax bill).
- Using tax-efficient investments for the core of your portfolio—including investments specifically designed to minimize taxes if you're in a high tax bracket.
- Placing any active funds and other higher-tax investments in tax-advantaged accounts to defer or eliminate those taxes.
- Drawing down your assets in tax-smart ways, including Roth conversions and charitable giving strategies.
... Combined with investment strategies from an industry leader
By combining tax-loss harvesting and other tax strategies with enduring, research-based investment strategies, you could increase your confidence you'll reach your goals. Throughout your relationship with us, our advisors are backed by Vanguard's proven investment methodology and a world-class team of portfolio construction experts.
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Frequently asked questions about Vanguard Personal Advisor tax-loss harvesting
Who could benefit
An advisor can talk with you about how much tax-loss harvesting could benefit you. Generally, you'll see the most positive impact from tax-loss harvesting if you:
- Have a substantial portion of your money invested in taxable accounts.
- Are in a higher tax bracket than you'll likely be in the future.
- Have purchased your investments at a variety of prices over time and have capital gains to offset using losses harvested by the service.
- Have a substantial portion of your investments advised by Vanguard Personal Advisor.
Yes. As with all aspects of investing, tax-loss harvesting comes with some risk.
- There's a risk you may not see any benefit (or you may experience a loss) if:
- The Vanguard surrogate funds bought with proceeds from tax-loss harvesting sales underperform the Vanguard funds sold.
- You're in a higher tax bracket in the future.
- You don't reinvest your tax savings, or the return on reinvestments is negative over the long term.
- There's also the risk that your tax-loss harvesting sales may violate the IRS wash-sale rule. If you buy the same or a "substantially identical" investment within 30 days before or after you sold at a loss, you won't be able to claim the loss. We'll attempt to use investments that won't be considered substantially identical by the IRS when we’re tax-loss harvesting.†† However, it's possible that transactions outside of your advised accounts could cause wash sales.
Tax-loss harvesting limits allow you to offset up to all your capital gains with losses during the same tax year, plus up to $3,000 of ordinary income. If there are remaining capital losses, you can carry forward those losses indefinitely to offset future gains. The bottom line is that you need to have realized capital gains to offset in order to truly benefit from tax-loss harvesting.
How it works
We've done extensive research and analysis to determine an optimal methodology for tax-loss harvesting. Our automated technology scans your portfolio every day the market is open to find opportunities for tax-loss harvesting in certain Vanguard ETFs, and we'll recommend selling investment lots of those ETFs that meet our research-based criteria.***
We'll first check if your portfolio needs rebalancing. For example, before we replace a stock fund investment with another stock fund, we'll make sure your overall portfolio isn't overweighted in stocks. If it is, we'll use the proceeds from the sale to buy more of the underweighted asset class. If there’s no need to rebalance, we'll buy a Vanguard Replacement ETF††† that's similar to the sold investment but not substantially identical.
Get more for your money
Find out how a Vanguard advisor can help with personalized planning and strategies.
*Source: Morningstar's tax-cost ratio as of November 2021, based on the 10-year average returns (17%) and median tax-cost ratio (1.45%) for large-blend funds. Calculation is based on the highest tax rates in effect at the time of the distribution.
**Vanguard, Tax-Loss Harvesting: A Portfolio and Wealth Planning Perspective (PDF) (Kevin Khang, Ph.D., et al., 2020).
***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.
†Vanguard is investor-owned, meaning the fund shareholders own the funds, which in turn own Vanguard.
††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 funds or ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
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.
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.
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