The Boost: Passive investors can also tax-loss harvest

When Mezzi launched on Product Hunt a couple weeks ago, we received this question:

“Does tax-loss harvesting apply to ETFs and mutual funds or only stocks? I’m wondering if it applies to people like me, who don’t trade individual stocks but buy and sell various funds throughout the year.”

Absolutely! In fact, it’s often easier to maintain market exposure when tax-loss harvesting with fund investments. This week we walk through how with a personal example.

🧠 What you need to know

Tax-loss harvesting involves selling a position with losses in order to reduce your taxes, either by offsetting capital gains or maximizing your ordinary income tax deduction. In order to receive the tax benefit, the IRS does not allow investors to repurchase the same stock, ETF, or mutual fund for 31 days. However, they can buy similar securities.

In fact, many professional wealth advisors and robo advisors like Wealthfront and Betterment employ this strategy of repurchasing similar securities to boost returns. Data shows that effective tax-loss harvesting can increase returns by approximately 1%. Over several years, that 1% compounds to much more.

Note: Tomorrow, December 29th, is the last day to harvest losses for the 2023 tax year, however you can continue to evaluate tax-loss harvesting opportunities throughout 2024 and beyond for future tax years.

💰 A personal example

In order to maximize my ordinary income deduction, this past week I sold the iShares Biotechnology ETF (IBB) and realized a nearly $1,000 loss in one of our family’s taxable investment accounts on a roughly $5,000 position. However, I do believe in owning biotech stocks for the long-term and would like to maintain exposure. Instead of waiting 31 days for the wash sale period to pass and repurchasing IBB, I bought approximately $5,000 of Invesco Nasdaq Biotechnology ETF (IBBQ).

IBBQ offers similar exposure as many of its holdings overlap with IBB, although there are some key differences. For example, IBBQ’s top holdings include AstraZeneca, which isn’t found in IBB. Allocations also vary; IBBQ has 3.85% allocated to Moderna, while IBB has 3.25% allocated.

There are numerous ETFs out there, so if you intend to swap from one ETF to another, you should shop around for what best fits your goals, including potential returns and fees.

🤝 How can Mezzi help?

Mezzi makes it simple to tax-loss harvest throughout the year by:

  • Identifying positions with losses across all of your taxable accounts.
  • Suggesting alternative stocks, ETFs, and mutual funds that offer similar exposure.
  • Calculating your potential tax savings.
  • Comparing ETFs based on returns and fees.

Happy Holidays and Happy New Year! We’re so grateful to have you in the Mezzi community and we wish you a prosperous 2024.