And despite some recent years of poor performance, there’s still value in being a bond investor. For starters, bonds are priced at the most attractive point they’ve been in decades. In addition, bonds have a self-healing mechanism: If held to maturity (and if they don’t default), they’ll eventually recoup these current losses over time. Bonds currently offer attractive yields as well as opportunities for capital appreciation in the future.
This leads to another advantage of applying tax-loss harvesting to fixed-income portfolios today: The opportunity to not only rebalance allocations that have shifted, but also to upgrade to investments with better relative performance and fees—all in a more tax-efficient manner.
The 411 on Tax-Loss Harvesting
To avoid running afoul of the IRS, there are important rules to know about tax-loss harvesting. First, how long you’ve owned an investment matters when determining whether you have long-term gains and short-term gains. Long-term gains, for assets held for a year or more, are taxed at lower rates (0%-20% depending on your income). Short-term gains, for investments held for less than a year, are taxed at your federal income tax rate (10-37%). You can offset long-term gains with long-term losses and short-term gains with short-term losses.
Second, if your losses exceed your gains, you can apply an additional $3,000 per year to reduce your taxable income for that year. If you have even greater losses than that, you can hang on to those losses indefinitely to reduce your income and tax liability by up to $3,000 per year in future years.
Third, you can’t sell an investment to claim a tax loss and then immediately repurchase it. This is called a wash sale. The IRS requires you to wait 30 days to repurchase that asset, or, if you want to replace that asset sooner, you must find something that’s not “substantially identical.” Otherwise, you risk negating the tax benefits.
