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At an upcoming appointment, your advisor will talk with you about our tax-loss harvesting service and help you enroll if it's right for you.
To prepare for the discussion, check out our video on how it works and read the FAQs below.
Tax-loss harvesting at a glance
Tax-loss harvesting is one of the strategies a Vanguard financial advisor can use to help keep your portfolio tax efficient. It’s especially useful when markets are volatile, because it’s about using investment losses to help lower your tax bill for the year. It’s a silver lining that can help you feel more in control without making major changes to your financial plan. Here’s a quick look at how it works.
Market ups and downs are a normal part of investing. Let’s say that some of the funds you own end up going down in value during market volatility. With tax-loss harvesting, we sell shares of those funds to capture the loss, and then we use the proceeds to buy other funds that have similar market exposure. Reinvesting is key, because we want your asset mix to stay in line with your financial plan. You then can use the losses we captured with that sale to offset capital gains from your other investments in the same tax year. You might be able to offset part of your ordinary income for tax purposes, too.
Let’s look at it with some real numbers. Say we sell some of your investments at a $30,000 loss, but you end up with $20,000 in realized gains from other investments.
Your losses would offset your gains, which means that you won’t pay capital gains taxes —and you’ll have $10,000 in losses left over. Under current tax rules, you can use up to $3,000 of that to offset your ordinary income, and you’d be able to use the remaining $7,000 to offset gains or income in future tax years. And there’s your silver lining!
We review your portfolio regularly for opportunities to harvest losses in certain Vanguard funds to offset gains from other investments. And we’re careful to avoid wash sales in your advised accounts when we use tax-loss harvesting. A wash sale happens when you sell an investment at a loss and quickly repurchase the same investment—or one that the IRS considers “substantially identical.” According to IRS rules, you can’t claim losses from a transaction if you have a wash sale. So when we buy new securities, we choose funds we believe the IRS won’t see as substantially identical to the ones we harvested.
A financial advisor can help you get a complete picture of your portfolio and decide if tax-loss harvesting is a good fit for you. You can’t control the markets, but you do have some control over when and how much you pay in taxes. We’re here to keep that conversation going and help you reach your investing goals.
Important information:
Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and could introduce portfolio tracking error into your accounts. There may also be unintended tax implications, such as disallowed losses resulting from wash sales or potentially greater tax liabilities in the future as a result of tax-loss harvesting.
All investing is subject to risk, including the possible loss of the money you invest.
Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.
©2021 The Vanguard Group, Inc. All rights reserved.
Get answers to your questions about tax-loss harvesting
Who could benefit
Your 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 now 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 Services®.
Yes. As with all aspects of investing, tax-loss harvesting comes with some risks.
- There's a risk you may not see any benefit (or you may experience a loss) if:
- The funds bought with proceeds from tax-loss harvesting sales underperform the 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 your advised accounts could cause wash sales.
Generally, you’ll see the majority of tax-loss harvesting activity when there’s a high level of market volatility. This could happen almost immediately, or not for months or even years.
You can offset all of your capital gains with losses during the same tax year, plus up to $3,000 of ordinary income. If there are remaining 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.
Your advisor will recommend tax-loss harvesting if they believe it’ll likely result in better outcomes for you in the form of lower taxes. You can reinvest the money saved from lower taxes to grow your money faster. While we can’t guarantee results, deciding not to sign up could mean you’ll miss potential opportunities for additional growth.
How it works
Tax-loss harvesting involves selling an investment that has experienced a loss and replacing that investment with a different holding designed to maintain your asset allocation. It can primarily add value in the form of reduced income taxes when realized ("harvested") losses are used to lower a tax bill by offsetting realized capital gains and up to $3,000 of ordinary income (based on current tax provisions). Additionally, tax-loss harvesting may increase after-tax returns if those tax savings are reinvested, assuming the additional investments experience compounded growth in the markets over time.
We’ve done extensive research and analysis to determine an optimal methodology for tax-loss harvesting. We’ll scan your portfolio every day the market is open to find opportunities for tax-loss harvesting in certain Vanguard funds, and we’ll recommend selling investment lots of those funds that meet our research-based criteria. Details on which Vanguard funds can be harvested will be available in the Tax-Loss Harvesting Addendum to Your Service Agreement for Vanguard Personal Advisor Services that you'll discuss with your advisor.
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 surrogate Vanguard fund that’s similar to the sold investment but not substantially identical. Details on which Vanguard funds can be used as surrogates will be available in the Tax-Loss Harvesting Addendum to Your Service Agreement for Vanguard Personal Advisor Services that you'll discuss with your advisor.
The IRS hasn’t defined “substantially identical,” but an example could be replacing a fund that tracks the S&P 500 Index with another fund that also tracks that index.
The surrogate funds Vanguard Personal Advisor uses to replace any investments harvested for losses are intended to provide similar investment exposures—but not so similar that we think they'd cause a wash sale.
Surrogate funds are the ETFs (exchange-traded funds) Vanguard Personal Advisor uses to replace investments sold to harvest losses. They are Vanguard ETFs® with similar asset and sub-asset allocations to the funds we're replacing. Details on which Vanguard funds can be used as surrogates will be available in the Tax-Loss Harvesting Addendum to Your Service Agreement for Vanguard Personal Advisor Services that you'll discuss with your advisor.
No. Tax-loss harvesting is included in your Vanguard Personal Advisor fee.
How it fits with your strategy
Tax-loss harvesting is a tax strategy—not an investment strategy. Your overall portfolio will still align with your goals, timeline, and risk tolerance. Tax-loss harvesting allows you the ability to reduce your taxes while still adhering to your investment strategy.
Your investments will fluctuate during periods of volatility as lots are sold and replaced with surrogate Vanguard funds. As new money comes into your accounts (whether it’s the result of new investments or sales of existing investments), we’ll invest that money in your “core” Vanguard funds as long as it won’t trigger a wash sale. That way, the majority of your money will return to your core funds over time.
Vanguard’s investment philosophy and the Vanguard Personal Advisor methodology have a clear focus on investing for the long term. It’s important to note that tax-loss harvesting trades aren’t intended to change the allocation of a portfolio or to make investment decisions based on what’s performing best at a given moment. Instead, surrogate Vanguard funds are specifically chosen so that your portfolio’s overall asset allocation and suballocation should remain close to your target, while still allowing you to get a potential tax benefit.
Download a copy of frequently asked questions about tax-loss harvesting (PDF).
More questions?
We’re ready to answer them at your upcoming appointment.
*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.
We recommend that you carefully review the terms of the Tax-Loss Harvesting Addendum to Your Service Agreement for Vanguard Personal Advisor Services 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.
Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.