Harvest Time: Managing Taxes With Loss Harvesting


Many investors know the key benefits of exchange-traded funds (ETFs): lower costs, trading flexibility, transparency and tax efficiency. Fewer people are aware that ETFs also may help reduce tax bills through a strategy called tax-loss harvesting. It’s a strategy with taxable accounts that can be employed throughout the year—and useful whenever volatility strikes—to sell losing positions to offset capital gains. 

Here’s how ETFs have the potential to save you money at tax time.

Market turbulence can be an opportunity to reassess your portfolio. Capitalizing on losses can help offset future gains while also giving you the ability to rebalance your portfolio. Taxes alone shouldn't drive investment decisions. But harvesting losses made in concert with an overall investment plan may ease the future tax-bill sting.

How Tax-Loss Harvesting Works

Investment losses can be hard to swallow, but tax-loss harvesting lets you take the losses of one investment to offset the gains of another.1 Of course, taxes alone shouldn't drive investment decisions. But harvesting losses in concert with your overall investment plan could help with tax planning when you are rebalancing your portfolio.

Tax Efficiency + Cost Efficiency: Many ETFs are available on no-transaction-fee (NTF) platforms. Investors who buy an ETF on a NTF platform do not pay a ticket charge . Additional cost savings is yet one more reason to consider using ETFs when replacing a security sold at a loss.


What To Know About Wash Sales

There are specific rules around tax-loss harvesting when it comes to choosing a replacement security. The IRS prohibits a wash sale, which is buying a substantially identical security within 30 days before or after selling a security at a loss.

Download our "Harvest Time" flyer for a framework to determine if you are dealing with substantially similar securities and for more tax-loss harvesting tips. It also addresses recent changes in tax law that you should keep in mind, including the CARES Act and the Tax Cuts and Jobs Act (TCJA).

For more options for investors who are worried about paying higher taxes, check out our municipal bond ETF.


Tax-Loss Harvesting Do's and Don'ts

Use our framework as a starting point for year-end tax planning discussions.

1 Long- and short-term capital gains are taxed at different rates. Long-term gains may only be offset by longer-term losses. Likewise, short-term gains may only be offset by short-term losses.

IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.

Exchange Traded Funds (ETFs) are bought and sold through exchange trading at market price (not NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

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