Tax‑Loss Harvesting Turns Bond Losses into Savings Opportunities

Rising Treasury yields have driven bond prices down, leaving some holders with unrealized losses—and a chance to use those losses for tax planning.

The 10‑year and 30‑year Treasury yields climbed to their highest point in 24 years this week, levels not seen since 2002, before easing on Friday after a softer‑than‑expected jobs report.

Investors who purchased individual bonds, bond mutual funds or ETFs when yields were lower may now be sitting on losses. Financial and tax advisors note that selling a portion of those holdings in a taxable brokerage account can help offset taxable gains elsewhere in the portfolio.

“It can be a good opportunity to sell those bonds with unrealized losses, turning them into realized capital losses that can offset other capital gains,” said Marianela Collado, senior wealth advisor and CEO of Tobias Financial Advisors in Plantation, Florida.

The approach is known as tax‑loss harvesting: an investor sells a security for less than its purchase price, realizes the loss, and applies it against capital gains.

“Tax‑loss harvesting should be reviewed on a regular basis. It offers a tax‑efficient way to offset realized capital gains from a strong equity market while fine‑tuning portfolio allocations,” added Collado, who is a certified financial planner, certified public accountant and a member of CNBC’s Financial Advisor Council.

Start with this tax‑loss harvesting checklist

Peopleimages | Istock | Getty Images

Many investors postpone tax‑loss harvesting until December, but reviewing taxable fixed‑income holdings earlier can provide more flexibility before the year‑end rush.

Consider these four steps:

1. Identify losses in taxable brokerage accounts. Tax‑loss harvesting generally yields no benefit in tax‑advantaged accounts such as 401(k)s and IRAs.
2. Sell a security trading below its tax cost basis. An unrealized loss is not enough; the investment must be sold to realize the loss.
3. Apply the loss to offset capital gains. If capital losses exceed gains, investors may generally use up to $3,000 of net capital losses to reduce ordinary income for the year (or $1,500 for married taxpayers filing separately). Any unused losses can be carried forward.
4. Reinvest prudently. The aim is to remain invested when appropriate—not to attempt market timing.

Avoid the wash‑sale rule

Investors who sell an individual bond, bond fund or ETF at a loss must watch what they buy next.

The IRS wash‑sale rule can disallow a tax loss if the same or a “substantially identical” security is repurchased within 30 days before or after the sale.

The rule also applies when the replacement security is bought in an IRA or Roth IRA. Experts advise reviewing all accounts before executing a sale.

Don’t sell solely for a tax break

Tax‑loss harvesting isn’t suitable for every investor.

Those who hold a ladder of individual bonds, are comfortable with their income and intend to hold the bonds to maturity may not need to sell, Collado said. As bonds mature, the proceeds can be reinvested in newer, higher‑yielding issues.

For others, the current yield environment offers a chance to reassess their fixed‑income allocation.

“At today’s yield levels, investors can consider not only tax‑loss harvesting but also portfolio rebalancing,” said Gotelli.

Experts recommend that such a review include time horizon, income needs, interest‑rate risk and diversification.

“Whenever a market segment declines, it’s wise to revisit performance, quality and yield across the board,” Collado added.

Investors in their 30s often have more latitude to endure bond‑market volatility than those approaching retirement, said Brant Wong, head of retirement solutions at Principal Asset Management, the investment management arm for Principal Financial Group.

Before executing a trade, consider transaction costs, tax implications and whether the shift alters your portfolio’s risk level, Collado said. A tax loss can be useful, but it should support—not dictate—your investment strategy.

Source link