This year, tax-loss harvesting has a bushel of opportunities

Your clients may have experienced significant losses this year as both stocks and bonds ran head-on into inflation and rising rates. An astute tax-loss harvesting strategy can help mitigate these losses and allow you to put concrete numbers around the value you provide to your clients.

In most years, tax-loss harvesting focuses on stocks, but this year, fixed income is in the picture because bonds experienced historic losses. As a result, you have an expanded opportunity to assess entire portfolios and:

• Move clients into new fixed income products while prices remain low.
• Position clients to benefit from higher interest rates.
• Restructure to improve client outcomes while avoiding capital gains that might have occurred in more typical years.

If your assessment calls for realizing losses across a broad swath of client holdings—or you see an opportunity to consolidate investments—this may be the time to consider strategic model portfolios.

Traditional tax season has barely begun, but we believe much of the bond market pain is behind us, and it's possible that the market will reverse course, so you may want to start harvesting losses now. As always, your overall investment strategy should drive these decisions. Tax losses are just one aspect of that strategy.

Keep an eye on capital gains

Despite this year's heavy losses, some actively managed funds may still distribute large amounts of capital gains. In some instances, if a fund is distributing a large capital gain, it may make sense to sell the fund to avoid the distribution. To decide whether selling to avoid a gain is a smart strategy, be sure to take unintentional taxes or penalties you may trigger into account.

Capital losses can offset any gains and up to $3,000 in yearly income. If capital losses exceed those amounts, they can be carried forward to offset up to $3,000 in annual income, indefinitely, until they are gone.

Take advantage of ETFs as tax-loss harvesting vehicles

ETFs can be smart choices when considering tax-loss harvesting decisions. In addition to considering timing, keep in mind that if you want to maintain current allocations, you can still sell an investment and then buy an exchange-traded fund (ETF) that is highly correlated to the original, whether as an individual holding or as an underlying vehicle in a strategic model portfolio. Compared to mutual funds, ETFs provide greater liquidity, which can help avoid triggering the wash-sale rule. Mutual funds also may charge fees for short-term trading.

Discussing these strategies can help clients see the value you are bringing to their portfolios. After all, who doesn't love a lower tax bill? You can share the savings that your tax-loss harvesting recommendations will generate as part of a broader discussion about client portfolios and goals.

Vanguard offers a range of fixed income ETFs and model portfolios that can help you set your clients up for success in 2023 and beyond.

For assistance with available tax strategies, please contact your sales executive. Ask about our free portfolio analytics tool, which can provide detailed, highly customizable comparisons of your existing portfolios to those you may be considering.

Notes:

• For more information about Vanguard funds and ETFs, visit advisors.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.
• Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
• All investing is subject to risk, including the possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
• Vanguard does not, and will not, make any representations about whether a model portfolio is in the best interest of any investor, is not, and will not be, responsible for the determination of whether a model portfolio is in the best interests of any investor, and is not acting as an investment advisor to any investor.
• 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. We recommend that you carefully review the terms of the consent and consult a tax advisor before taking action.
• Investments in bonds are subject to interest rate, credit, and inflation risk.