The recent downturn in the bond market has left many investors nursing significant losses, yet this period of distress also presents a lucrative opportunity for tax-loss harvesting. With the 10-year Treasury yield hovering near 5% and bond prices declining, investors who purchased bond mutual funds or ETFs during periods of lower yields are likely holding unrealized losses. While tax-loss harvesting is traditionally executed in December—selling investments at a loss to offset gains in other areas—there is no obligation to wait. The very factors currently depressing bond ETF values, namely rising yields, simultaneously offer a tax asset and the chance to reinvest at more favorable rates.
“Tax-loss harvesting is frequently treated as a year-end obligation, yet markets operate independently of the calendar,” noted senior portfolio managers Joseph Gotelli and Jason Greenblath in a recent report for American Century Investments. “The current fixed-income environment presents compelling opportunities to harvest losses, manage tax liabilities, and enhance yield and tax efficiency.”
This tax strategy has been increasingly recommended in recent years amid persistent bond underperformance. “It is prudent to implement tax-loss harvesting in client portfolios on a regular basis when opportunities arise,” Vanguard Group stated in an ETF industry perspective in the fourth quarter of last year. Vanguard highlighted bond price declines and record stock market highs, noting that the latter made tax-loss harvesting in equities “just about impossible to find.”
Below is what bond investors need to know about tax-loss harvesting to capitalize on the current market selloff.
Vanguard, iShares Bond Funds Emerge as Prime Tax-Loss Targets
The recent selloff has provided many investors with a prime opportunity for tax-loss harvesting. For instance, the Vanguard Total Bond Market Index Fund ETF (BND) and the iShares Core U.S. Aggregate Bond ETF (AGG) have both declined more than 3.5% year to date.
“This represents an opportunity to strike while the iron is hot, as there is no guarantee these losses will persist,” said Conor Kelly, a partner and senior financial advisor with Prime Capital Financial in Overland Park, Kansas. “You do not want to wait until year-end, as these losses could vanish or significantly diminish.”
This chart illustrates the year-to-date performance of the Vanguard Total Bond Market ETF and iShares Core U.S. Aggregate Bond Fund in 2026.
Kristin Larson, founder and wealth advisor at NewSpring Wealth Partners in Minnetonka, Minn., noted that tax-loss harvesting in bonds is particularly relevant now given the double-digit returns in equities. The S&P 500, for example, has risen approximately 13% year-to-date. “For many clients, the bond portion of the portfolio is currently the only segment experiencing a decline,” Larson stated.
Cost Basis Analysis of Your Holdings Is Critical
Do not rely solely on the current price of your fund to determine whether to sell.
“A negative price return does not automatically guarantee a tax loss,” explained Bill Schwartz, managing director at Wealthspire’s Potomac, Maryland office. For example, if you purchased the Vanguard Total Bond Market Index Fund ETF on Jan. 2 without reinvesting dividends or interest, you would have a tax loss for the year to date due to the price decline, as the ETF closed at 74.04 on Jan. 2 and 71.40 on Sept. 21. “However, if you made multiple purchases across several years, there is no guarantee you will realize a tax loss,” Schwartz added.
Begin by analyzing the cost basis, which represents the purchase price of the shares plus any brokerage commissions or fees paid. Next, compare the current market value against the cost basis to determine whether the sale results in a gain or a loss. Remember that reinvesting dividends and interest increases your overall cost basis because you are acquiring additional shares. Your brokerage firm typically tracks this information for you, which is essential for identifying which holdings to sell for tax-loss harvesting purposes.
For simplicity, some investors may choose to sell their entire position. Alternatively, if they wish to maintain a different exposure, they might switch to a fund with varying credit quality or an underlying index, noted Mitch Schlesinger, chief investment strategist at Evermay Wealth Management in Arlington, Virginia. In such cases, they will evaluate the fund’s aggregate cost basis, which reflects the average of all purchases plus dividends and interest.
Identify Specific Positions for Attractive Tax-Loss Sales
However, advisors more commonly recommend that investors examine their funds more granularly to identify tax-loss harvesting opportunities. Depending on your purchase timing and reinvestment patterns, your overall portfolio might show a gain, yet specific positions within it could be sitting at a loss and available for sale.
Consider an investor who owns 100 shares of a hypothetical XYZ bond ETF. They may have purchased some shares two years ago and acquired more at a later date. In this simplified scenario, they would hold two distinct tax lots. Even if the entire position shows a gain, specific lots within the broader holding could be at a loss—specifically, the ones you would want to sell. “This underscores why it is critical to review tax lot details rather than just the overall gain or loss,” Larson noted.
This chart tracks the performance of the iShares 20+ Year Treasury Bond ETF since its inception.
Strategically selecting which lots to sell is crucial based on purchase dates and reinvestment patterns. An investor who bought an ETF in 2007, for example, might overall hold substantial gains, Schlesinger noted. “You must carefully examine the individual lots that were purchased.”
Your financial advisor can assist in determining which specific lots to sell. Alternatively, if you do not work with an advisor, review your online statement for a detailed breakdown of the cost basis for specific lots within a particular fund. If this information is not readily available online, contact your custodian to request the specifics.
Many online brokers offer a tax optimization feature that automatically selects the most advantageous lots to maximize losses or minimize gains, though you can also manually choose which lots to sell, Schlesinger noted.
Beware of the IRS Wash-Sale Rule
When executing a tax-loss harvest, you must be mindful of the wash-sale rule, an IRS regulation that disallows a tax deduction for a loss on the sale of a security if you purchase a substantially identical security within a 61-day window (30 days before or after the sale).
This involves making an investment decision on top of the tax decision, said Wealthspire’s Schwartz. For instance, if you are highly attached to your current position and lack a substantially different alternative, you might prefer not to sell shares. You could wait 31 days before repurchasing, but “you won’t know the opportunity cost until those 31 days have elapsed,” he added.
Exchange-traded funds (ETFs) can facilitate this sale and repurchase process, making it easier to execute.
That said, bonds present less downside when sitting on the sidelines for a brief period. It is easier to sell bond positions at a loss, even if the losses are minor, because the downside of holding cash is limited compared with missing out on gains in volatile stocks, said Prime Capital’s Kelly. “In fixed income, simply holding cash for 30 days before repurchasing is far less stressful than sitting out of a volatile stock for 30 days only to see it surge and move against you.”
Avoid Attempting to Time the Market
Yields, which have dipped in recent days, could rise again, particularly given the Federal Reserve’s decision to raise interest rates last week and indications of at least one more hike this year. Yields spiked on Wednesday following the release of hot economic data. Some investors may wish to delay harvesting losses, but timing the market is exceedingly difficult.
“You certainly could wait, and if rates continue to rise and bond prices fall further, you may have another opportunity to harvest an even larger loss,” Schlesinger said.
However, he stressed that the loss you have today is known, whereas the loss you might have tomorrow is not. “Harvesting a loss today does not mean you are finished for the year. If rates continue rising and new losses emerge in other holdings or the replacement investment, additional opportunities may arise later. Tax-loss harvesting is an ongoing process to monitor throughout the year, not a single trade where you must pick the perfect moment,” he explained.
Schlesinger also pointed out that the Fed’s actions typically target a very short-term interest rate, such as the Fed Funds rate, whereas longer-term Treasury yields are determined by the market and reflect expectations about inflation, economic growth, and interest rate trajectories years into the future. “Therefore, even if the Fed signals more rate hikes are coming, the yield on a five- or 10-year bond does not necessarily have to rise. In fact, if investors believe additional hikes will ultimately slow the economy and curb inflation, longer-term yields could remain stable or even decline. If that occurs, bond prices could recover, and today’s tax-loss harvesting opportunity could shrink or disappear,” Schlesinger stated.
“I would not attempt to perfectly time the bottom in bond prices. If there is a meaningful loss today and we can harvest it while maintaining the desired investment exposure for our clients, there is clear value in taking advantage of the opportunity that currently exists,” he added.
