Unlocking Tax Savings with Wealthfront Tax Loss Harvesting

Tax loss harvesting is a strategy that can help you save money on taxes. By selling securities that have declined in value, you can offset gains from other investments and reduce your tax liability.

Wealthfront's tax loss harvesting feature automatically identifies opportunities to sell securities at a loss, which can help you minimize taxes and keep more of your hard-earned money.

This feature is available to all Wealthfront clients, and it's included in the standard management fee.

Suggestion: Can I Make Money on Penny Stocks

Tax-loss harvesting is a powerful tool for reducing taxes and increasing after-tax income. Wealthfront's Tax-Loss Harvesting service automatically harvests losses to offset gains, saving clients money.

In 2020, the average new client who joined Wealthfront before November 1 with a risk score of 8 harvested losses equal to 17.89% of their portfolio value, representing an estimated after-tax benefit of 4.47% to 8.95% of their portfolio value.

Wealthfront's Tax-Loss Harvesting service paid for itself between 4 and 9 times in 2019, even in a year when the S&P 500 was up nearly 30%. This is a testament to the effectiveness of tax-loss harvesting in reducing taxes.

Here's an interesting read: Can I Write off Business Losses on My Personal Taxes

Tax-loss harvesting can also offset ordinary income, with a limit of $3,000 per year. Any additional losses can be rolled over to claim in future years.

Here's an example of how tax-loss harvesting can save money:

Tax-loss harvesting is not just tax deferral, but a tax savings strategy that can make a significant difference in after-tax income. By harvesting losses and offsetting gains, Wealthfront clients can save money and increase their after-tax returns.

Wealthfront's tax-loss harvesting service is automatic, which means you don't have to lift a finger to take advantage of it.

Wealthfront automatically enrolls you in the tax-loss harvesting program when you open a taxable investment account with them.

For the average new client who joined Wealthfront in 2020 with a risk score of 8, Wealthfront harvested losses equal to 17.89% of their portfolio value, representing an estimated after-tax benefit of 4.47% to 8.95% of their portfolio value.

Manual tax-loss harvesting is time-consuming and requires evaluating every tax lot in your portfolio daily, but Wealthfront's software can scale infinitely and does this task for you.

Wealthfront's software replaces the investment it sold with a highly correlated alternative investment that maintains the risk and return profile of your portfolio.

Broaden your view: Software Leveraged Etf

Wealthfront in 2020 was a remarkable year, especially for their Tax-Loss Harvesting service. 2020 was an unusually volatile year, and Tax-Loss Harvesting proved to be a silver lining for Wealthfront's clients.

For the average new client who joined in 2020 with a risk score of 8, Wealthfront harvested losses equal to 17.89% of their portfolio value so far that year. This represents an estimated after-tax benefit of 4.47% to 8.95% of their portfolio value, depending on their tax rates and ability to use the losses.

Wealthfront's Tax-Loss Harvesting service paid for itself between 4 and 9 times in 2019, even when the S&P 500 was up nearly 30%. This shows that the service can be beneficial in a range of market conditions, not just in exceptional years like 2020.

Discover more: Tax Shield Tax Service

Wealthfront's automated systems keep a watch 24/7 for ways to minimize your taxes through tax-loss harvesting. This strategy involves selling investments that have declined in value to offset gains and reduce your tax bill.

Tax-loss harvesting can save you thousands of dollars without impacting the strength or balance of your portfolio. If done correctly, you can even reinvest the saved money to make higher returns.

Robo-advisors like Wealthfront use algorithms to incorporate the 30-day IRS wash-sale rule, preventing you from repurchasing the same security within 30 days of selling it. This rule is in place to prevent tax evasion.

By using tax-loss harvesting, you can reduce your capital gains tax liability. For example, if you have a capital gain of $15,000 and sell a security for a loss of $7,000, your net capital gain will be $8,000, and you'll only have to pay $1,600 in capital gains tax.

This strategy is particularly useful for investors in the highest tax bracket, who can save up to $3,000 of ordinary income each year.

You might like: Leveraged Etf Strategy

Wealthfront's tax-loss harvesting service is an automated process that works by selling investments that have declined in value, generating a loss that can be used to offset up to $3,000 of ordinary income each year.

This process is done daily, which would be impossible for a human to do manually. Computers can scale infinitely, making it a task perfectly suited to software.

Wealthfront shares the results of its tax-loss harvesting and claims that on most accounts, the benefits from tax-loss harvesting more than offset the low 0.25% investment management fee.

Tax-loss harvesting involves selling a security that is worth less than its purchase price, calculating the total amount of the loss, and determining whether it is a short-term or long-term loss.

Here's a breakdown of how tax-loss harvesting works:

To avoid losing the tax-loss harvesting benefit, Wealthfront replaces the sold asset with one that is somewhat distinct, such as a consumer products sector fund to replace Procter and Gamble stock.

Robo-advisors like Wealthfront have automated metrics in place to ensure that an investor's portfolio remains balanced after a sale is made. They will purchase another ETF to replace the sold one, such as purchasing the Dow Jones Broad U.S. Market ETF to replace the Vanguard Total Stock Market ETF.

The IRS stipulates that only a maximum capital loss of $3,000 can be claimed against ordinary income in any given year. Any remaining capital loss can be rolled forward and applied against an individual's ordinary income in subsequent years.

Wealthfront's tax-loss harvesting feature is a game-changer for investors. It's like having a personal financial assistant watching over your portfolio 24/7 to minimize your taxes.

By using tax-loss harvesting, you can reduce your tax obligation on capital gains, which is a huge advantage. This is especially important because it can save you thousands of dollars in taxes over time.

Tax-loss harvesting also enables you to profit from market volatility by selling losing positions when markets fall and reinvesting the profits in similar assets at lower prices. This can result in higher long-term returns.

Here are the key benefits of Wealthfront's tax-loss harvesting:

Tax-loss harvesting is a strategy to legally cut taxes and increase after-tax income by selling securities worth less than their purchase price, creating a taxable loss that can be used to offset taxable gains.

The IRS has rules in place to prevent investors from abusing tax-loss harvesting, including the wash-sale rule, which prohibits buying back the same security within 30 days of selling it at a loss.

To offset ordinary income, tax-loss harvesting can be used to reduce taxable gains, but the limit is $3,000 per year, after which all additional losses can be rolled over to claim in future years.

The wash-sale rule is in place to stop people from selling an investment at a loss to offset a capital gain and then immediately buying it, or something pretty much identical, back.

Tax minimization strategies, like investing in tax-favored retirement accounts, can also help reduce taxes.

Here are some key tax rules to keep in mind:

Tax-loss harvesting can save you money by reducing your tax bill, but it's essential to understand the rules and limitations to avoid any potential issues with the IRS.

Let's take a closer look at how Wealthfront's tax-loss harvesting works in practice.

Wealthfront can sell an ETF to harvest a loss and then purchase a similar one to maintain the portfolio's balance.

In a real-life scenario, Wealthfront might sell the Vanguard Total Stock Market ETF to harvest a loss and then purchase the Dow Jones Broad U.S. Market ETF.

This is allowed because both ETFs are positively correlated and provide the same exposure.

After the 30-day wash sale period, the original ETF may be repurchased.

If an investor has a capital gain of $7,000 and a capital loss of $15,000, they can use $7,000 of the capital loss to completely offset the capital gain.

Worth a look: How to Sell Mutual Fund Shares

This leaves a remaining capital loss value of $8,000 that can be used to reduce their ordinary income for tax purposes.

The IRS allows a maximum capital loss of $3,000 to be claimed against ordinary income in any given year.

This means that if the capital loss exceeds $3,000, the excess can be rolled forward and applied against ordinary income in subsequent years.

In this case, the remaining $5,000 of the capital loss can be rolled forward and used in future years to reduce ordinary income.

Intriguing read: 3 Dividend Stocks to Buy and Hold Forever

Research has demonstrated that consistent tax-loss harvesting can increase long-term investment returns, and Wealthfront claims that it more than offsets their low investment management fee.

Tax-loss harvesting with a robo-advisor in a brokerage or non-retirement account is typically a wise move, but self-directed investors might have more difficulty with the process.

Individual investors need to regularly monitor their investments to uncover harvestable tax losses, and finding suitable replacements for the sold assets and avoiding the wash-sale rule requires expertise.

Discover more: How Do Angel Investors Make Money

Consult your accountant before embarking on a tax-loss harvesting program, as it's not a one-size-fits-all solution.

In most cases, the benefits from tax-loss harvesting in a taxable investment account are worth it, and you'll typically find a boost in your overall returns if the proceeds are reinvested into the investment markets to compound and grow.

Beginner self-directed investors might find the tax-loss harvesting procedure cumbersome and difficult to implement, so it's essential to weigh the pros and cons before making a decision.

Tax-loss harvesting can increase long-term investment returns if performed well, making it a worthwhile strategy for many investors.

Research has shown that tax-loss harvesting can more than offset the low investment management fee of low-fee robo-advisors like Wealthfront or Betterment.

However, individual investors might find it challenging to implement tax-loss harvesting on their own, requiring expertise and regular monitoring of their investments.

Self-directed investors need to regularly monitor their investments to uncover harvestable tax losses and find suitable replacements for the sold assets, all while avoiding the wash-sale rule.

Curious to learn more? Check out: Wealthfront Ai Investing

In most cases, the benefits from tax-loss harvesting investments in a taxable investment account are worth it, resulting in a boost in overall returns when the proceeds are reinvested into the investment markets to compound and grow.

But, tax-loss harvesting might not be worth it for everyone, especially those who are less convinced about the long-term future of a security they're replacing.

Robo-advisors have made tax-loss harvesting more accessible, keeping a watch 24/7 for ways to minimize taxes and potentially saving thousands of dollars without impacting the strength or balance of the portfolio.

A robo advisor can run tax-loss harvesting processes daily without human intervention, whereas a financial advisor typically only runs these processes once a year.

Traditional financial advisors can miss out on numerous tax-loss harvesting opportunities that are available in multiple portfolios, unlike robo advisors that are always on the lookout.

Wealthfront's automated robo platform can create an additional annual return of 1.11% to 1.98% depending on the tax burden of the investor.

Explore further: Citi Tax Financial