It’s Always Tax-Loss Harvesting Season
From: www.wealthmanagement.com
Many investors implement a year-end tax-loss harvesting strategy with their municipal bond portfolio. Limiting loss harvesting to year-end, however, reduces its benefits. It may be time to implement a managed year-round tax-loss harvesting strategy instead.
Investors occasionally look to their municipal bond portfolio for loss-harvesting opportunities that reduce the impact of capital gains taxes on portfolio returns. All too often, this occurs only toward year-end. As bonds have limited replacement options and typically wider bid-ask spreads, the tax alpha generated at the end of the year is likely below potential. We frequently see that the economic loss of selling out of positions at an inopportune time eliminates any tax benefit. Optimal results can be achieved by partnering with a professional manager and harvesting losses throughout the year, rather than just at year-end.
Why harvest losses year-round?
More favorable liquidity. Historically, the last few weeks of the year experience lower trading volume. Market participants who operate on a calendar year generally reduce activity during this time, and overall liquidity suffers. High liquidity costs can sometimes erode or outweigh the tax benefit of harvesting the loss. Minimizing transaction costs helps maximize tax alpha.
Access to attractive replacements. Typically, issuance slows at year-end as well. Trading throughout the full year presents more opportunities to access the new-issue market when replacing sales. An active new-issue supply gets cash reinvested more quickly and increases the likelihood of finding bonds with similar relative value to those sold. Access to a wider variety of bonds also may prevent wash-sale rule violations and ensure that investors maintain portfolio characteristics.
Optimized timing of sales. An optimal tax-loss harvesting strategy monitors positions daily and wastes no opportunity. If tax-loss selling takes place only at year-end, investors miss opportunities resulting from yield fluctuations throughout the year. Over the past 25 years, the yearly peak in municipal yields has occurred in December only twice: 2020 and 2016.
Efficiency and scale. Not only can year-round loss harvesting elevate after-tax total return potential, but it can also increase scale and efficiency for the advisor and client. Opting into professional, continuous monitoring of individual securities eliminates the need for the advisor to make year-end manual requests, which can be time consuming and labor intensive. Clients benefit from the time and attention focused on identifying opportunities and the superior execution a manager can provide.
