Home — Tax Loss Harvesting

Last Updated: January 26, 2015 9:31AM EST

We do things differently. Often, brokerages that do automated tax loss harvesting will switch out of a replacement security after 30 days. If there is a market upswing during that time, customers will incur a short-term capital gain when the broker does the switchback. We have eliminated this switchback tax because we are able to manage two similar ETFs per asset class in a portfolio using our innovative Parallel Position Management system.

What else makes us different? We provide the real numbersnot marketing hype around tax loss harvesting. Other investment managers may tout a bigger number on their websites, but look closely and youll see that the number represents the mean annual offset, not real tax alpha given different liquidation scenarios. Measuring the value of harvesting this way is misleading, and not the way we present the benefit. However, when we used that method and compared apples-to-apples, we found that over the last 13 years, Betterments mean annual tax offset was 2x greater than what you can get with methods used by the competition.

How did we accomplish that? One reason is TLH+ avoids tax-indifferent switchbacks, and never caused negative tax offsets over that period, even though the portfolio was rebalanced.

Given that improvement, heres how tax alpha looks for a sample investor. A person with annual income of $100,000 living in a high-income tax state such as California who initially invested $50,000 and invested $1,500 per month (increasing those deposits annually by 5% to account for salary growth and inflation), would have seen a real value +0.77% in additional returns between 2000-2013, even assuming that he liquidates 50% of the portfolio in 2014.

Thats extra returns for doing nothing other than turning on TLH+ no extra risk, no additional costs. Just smart investing. The competition ignores liquidation, which would expose their algorithms as being far less effective. With TLH+.

You are never exposed to short-term capital gains in an attempt to harvest losses. Through our proprietary Parallel Position Management system, a dual-security asset class approach which enforces preference for one security, we never trigger capital gains in an attempt to harvest losses.

You have zero cash drag at all times. With fractional shares, and seamless handling of all inflows during wash sale windows, every dollar is always invested at the desired allocation risk level.

Your harvests also serve as an opportunity to rebalance across all asset classes, rather than re-invest solely within the same asset class. This further reduces the need to rebalance during volatile stretches, which means fewer realized gains, and higher tax alpha.

You never experience disallowed losses through overlap with your IRA. We use a tertiary ticker system, completely eliminating the possibility of harvested losses being permanently disallowed due to IRA activity. This makes our TLH+ ideal for those who invest in both taxable and tax-advantaged accounts.

​You only need $50,000 to access TLH+. Other services require a balance of $100,000 or more to access a tax loss harvesting service.

You can read more about the benefits of TLH+ and how it works inside your account in our white paper. ​

Last Updated: July 14, 2014 7:15PM EDT

The wash sale rule disallows the realization of a loss from selling a security if a substantially identical security is purchased 30 days or before the sale. The rationale is that a taxpayer should not enjoy the benefit of deducting a loss if he or she did not truly dispose of the security.

The wash sale rule applies not just to situations when a substantially identical purchase is made in the same account, but also when the purchase is made in the individuals IRA account, or even in a spouses account. This broad application of the wash sale rule seeks to ensure that investors cannot utilize nominally different accounts to maintain their ownership, and still benefit from the loss.

​This includes your spouses holdings (IRA, 401k and taxable investments)even one dividend reinvestment elsewhere can throw off Betterments careful harvests and reduce your net tax benefit. (The IRS does not consider a shift of ownership from one spouse to another as a true disposal, for purposes of the wash sale rule.)

You especially want to avoid a wash sale involving an IRA account. In general, a washed loss is postponed until the replacement is sold, but if the replacement is purchased in an IRA account, the loss is permanently disallowed.

Using our Parallel Position Management system, we weigh wash sale implications of every deposit and withdrawal and dividend reinvestment, and systematically choose the better outcome. The system protects against IRA wash sales in a completely unique and airtight waynobody else does this. Additionally, it protects not just harvested losses, but also losses realized through customer withdrawals. When appropriate, TLH+ even optimizes deposits prior to a harvest, potentially allocating to alternate assets in anticipation of harvesting.

Betterment is the only investing service to provide tax loss harvesting in coordination with an IRA account to maximize the benefit.