These techniques, which may help investors reduce the tax burden and protect their wealth, include:

• Buy and hold Using a long-term perspective when investing can delay capital gains recognition. The incentive to do so is higher, as long-term gains are taxed at a lower rate than short-term gains. This technique can also help keep unnecessary turnover low, potentially minimizing short-term gains.
• Tax-loss harvesting Using tax-loss turnover in a disciplined fashion to harvest losses can help offset gains taken elsewhere in the portfolio. Essentially, this means a fund will unload some shares to intentionally realize a capital loss to offset capital gains.
• QDI Tax-managed equity funds typically follow holding period rules to have any dividends qualify to be taxed at the lower qualified dividend income (QDI) rate.
• Tax lot selling Specific lot accounting is a strategy tax-managed equity funds can use to help minimize capital gains realizations. By selling shares with the highest basis first, investors may minimize capital gains.
• Buy and hedge Funds may also use tax-advantaged hedging techniques as alternatives to taxable sales in order to manage gains and losses, potentially maximizing after-tax returns.

It’s time to consider tax-managed equity investing

While higher taxes may be particularly painful for high-income earners, the reality is, the tax increases have a much broader effect due to increases in capital gains distributions. Investors should be aware that they may be overlooking taxes in their pursuit of pretax excess returns. As a result, negative tax consequences frequently wipe away pretax alpha, or excess return relative to a benchmark.

Given the recent increase in capital gains tax rates and the possibility they may increase in the future, taxable investors should consider active tax management in their portfolios. Tax-managed investing may help defend against the tax drag on equities. Given the cyclical nature of capital gains, tax-managed equity investing may provide several advantages, including:

• It can help cushion the effect of recent (and possible future) increases in income tax and capital gains rates.
• A long-term, buy-and-hold strategy with appreciated stocks can reduce the frequency and dollar value of capital gains distributions, and the rate at which they are taxed.

Eaton Vance does not provide legal or tax advice. This material is not intended to act as such advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel prior to investing.