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Tax-Loss Harvesting


Opportunities abound to reduce taxes, regardless of market conditions


One of the biggest reasons passive investors seek out direct indexing is its ability to unlock losses at the individual security level—something a mutual fund or ETF can’t do—and potentially reduce their tax bill. How valuable is this benefit? And are the savings worth the effort?

 

Losses: Every investor experiences them



But not every investor—or their advisor—uses them to their full advantage. Many don’t even think about selling securities trading at a loss until December, missing out on losses that occurred earlier in the year. In our Custom Core® and laddered fixed income accounts, Parametric monitors client portfolios on a daily basis, all year long, systematically harvesting losses in a way that optimizes their value to the investor.

Are you leaving money on the table?

Even in years when the major equity indexes are broadly up, many stocks fall—some by significant percentages at certain times during the year, especially during periods of market volatility. You can use the charts below to see the number of securities that traded at a loss during different periods in two major indexes.

How does tax-loss harvesting work?

Tax-loss harvesting at the individual security level is a key benefit of direct indexing. But it’s not as simple as selling a security for a loss and then repurchasing that same security the next day so you can reset the cost basis. This short video explains how it actually works.

Let’s talk tax

Interested in learning more about how Parametric manages tax in our direct indexing portfolios? We’re happy to share more detail, including methodology, supporting research, and performance data. Complete the form below, and a representative will get in touch.

Turn your losses into wins

Why systematic, year-round tax management is so important.

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Make market volatility
work for you


Price drops can happen at any time. Harvesting losses systematically means never missing out on opportunities to offset current and future realized capital gains.

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Ease out of
concentrated positions


Have a lot of appreciated company stock? Diversifying to reduce risk means realizing some capital gains. Systematic loss harvesting in a direct indexing portfolio can help offset those gains—and reduce tax liability.

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Carry losses
forward


Even if you can’t use losses to offset realized gains in the current tax year, US tax law allows you to hold on to those losses indefinitely for use in future tax years.

Frequently asked questions

What is tax-loss harvesting?
Anytime you sell a security below its cost basis, you can use, or harvest, that loss for tax purposes to offset realized capital gains elsewhere in your investment holdings. You don’t even have to use the loss in the current tax year. You can harvest it, then carry it forward indefinitely into future tax years.
How does Parametric approach tax-loss harvesting?
Unlike other direct indexing providers, Parametric uses a trigger-based method for tax-loss harvesting, not a calendar-based method. We monitor all accounts on a daily basis but execute a loss-harvesting trade only when it provides a certain level of benefit (above and beyond transaction costs, for example), taking into account tracking error against the investor’s chosen benchmark(s), client-selected customizations, and other portfolio characteristics. Learn more about the difference between calendar- and trigger-based loss harvesting.
Can tax-loss harvesting improve returns?

Third-party research has shown that tax management can add 1%–2% in after-tax excess returns for equity and 0.3% for fixed income.* This is known as tax alpha.


* Shomesh E. Chaudhuri, Terence C. Burnham, and Andrew W. Lo. 2020. “An Empirical Evaluation of Tax-Loss-Harvesting Alpha.” Financial Analysts Journal 76:3, 99–108, and Andrew Kalotay. 2016. “Tax-Efficient Trading of Municipal Bonds.” Financial Analysts Journal 72:1, 48–57. These studies did not involve Parametric or its clients. There is no guarantee that a tax-management strategy will result in increased after-tax returns. Results will differ based on an individual investor’s circumstances.

When should I consider a tax-loss harvesting strategy for my clients?
High-net-worth investors may find the most value from tax-loss harvesting in a direct indexing portfolio, especially if they have—or anticipate having—realized capital gains elsewhere in their holdings. But trying to time tax-loss harvesting risks missing the bigger picture: The value of tax-loss harvesting in a direct indexing context is its always-on nature. For passive investors, capturing losses opportunistically and systematically, and not just once a year, can materially improve after-tax portfolio performance.
Can you harvest losses on bonds too?
Yes. If a bond’s price drops below its cost basis, you can sell it and harvest that loss for tax purposes. Parametric does this regularly in our laddered fixed income portfolios, selling bonds and then replacing them with those that have similar credit, yield, and maturity profiles. Learn more about tax-loss harvesting with fixed income.
What is direct indexing?
Like an index fund, direct indexing gives you passive exposure to a large number of stocks or bonds. Unlike an index fund, it’s not packaged as a single security. Instead it’s offered as a separately managed account, or SMA, and it gives you direct ownership of each individual stock or bond in the portfolio. This unlocks tax-loss harvesting at the individual security level, plus a host of other benefits, including ESG screens, blended benchmarks, factor tilts, more flexible charitable giving options, and other customizations. Learn more about direct indexing.

More to explore

Tax Loss Harvesting in a Straight Up Market
Blog post

Tax Loss Harvesting in a Straight Up Market
Jeremy Milleson}

by Jeremy Milleson, Director, Investment Strategy

December 9, 2024

We believe it’s crucial to monitor direct indexing accounts regularly for tax loss harvesting opportunities.
Read more
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Equities, Direct indexing, Tax management, Wealth manager, +1