Tax Strategies

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Save on taxes and have more money to invest

Capital gains taxes can drain away about 15% to 20% of your realized gains each year. Compounded over time, that could be a huge missed opportunity. Our advisors consider taxes from the moment you enroll. As we optimize your portfolio, we'll focus on strategies that work to maximize your after-tax returns. Tax-loss harvesting (TLH) is one way we can do that.

Tax-loss harvesting at a glance

See how we use tax-loss harvesting to help keep your portfolio more tax efficient.

"It's a silver lining that can help you feel more in control."

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Tax-loss harvesting at a glance

Tax-loss harvesting is one of the strategies a Vanguard financial advisor can use to help keep your portfolio tax efficient. It's especially useful when markets are volatile because it's about using investment losses to help lower your tax bill for the year. It's a silver lining that can help you feel more in control without making major changes to your financial plan. Here's a quick look at how it works.

Market ups and downs are a normal part of investing. Let's say that some of the funds you own end up going down in value during market volatility. With tax-loss harvesting, we sell shares of those funds to capture the loss, and then we use the proceeds to buy other funds that have similar market exposure. Reinvesting is key, because we want your asset mix to stay in line with your financial plan. You then can use the losses we captured with that sale to offset capital gains from your other investments in the same tax year. You might be able to offset part of your ordinary income for tax purposes too.

Let's look at it with some real numbers. Say we sell some of your investments at a $30,000 loss, but you end up with $20,000 in realized gains from other investments.

Your losses would offset your gains, which means that you won’t pay capital gains taxes—and you'll have $10,000 in losses left over. Under current tax rules, you can use up to $3,000 of that to offset your ordinary income, and you'd be able to use the remaining $7,000 to offset gains or income in future tax years. And there's your silver lining!

We review your portfolio regularly for opportunities to harvest losses in certain Vanguard funds to offset gains from other investments. And we're careful to avoid wash sales in your advised accounts when we use tax-loss harvesting. A wash sale happens when you sell an investment at a loss and quickly repurchase the same investment—or one that the IRS considers “substantially identical.” According to IRS rules, you can't claim losses from a transaction if you have a wash sale. So when we buy new securities, we choose funds we believe the IRS won't see as substantially identical to the ones we harvested.

A financial advisor can help you get a complete picture of your portfolio and decide if tax-loss harvesting is a good fit for you. You can't control the markets, but you do have some control over when and how much you pay in taxes. We're here to keep that conversation going and help you reach your investing goals.

Important information:

Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and could introduce portfolio tracking error into your accounts. There may also be unintended tax implications, such as disallowed losses resulting from wash sales or potentially greater tax liabilities in the future as a result of tax-loss harvesting.

All investing is subject to risk, including the possible loss of the money you invest.

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.

© 2022 The Vanguard Group, Inc. All rights reserved.

How does tax-loss harvesting work to help you optimize your portfolio?

Monitors portfolio daily

Our proprietary technology periodically scans your portfolio looking for opportunities in harvestable Vanguard ETFs® that have gone down in value.* This occurs after other applicable portfolio activities—like rebalancing—are prioritized.

Harvests losses automatically

We sell shares of harvestable Vanguard ETFs that meet our research-based criteria and reinvest the money in a similar investment (or use it to rebalance, if needed), keeping you fully invested and your allocation on track.

Allows you to offset capital gains

You can use the losses to offset any realized capital gains you have for the year and up to $3,000 of regular taxable income. If you have leftover losses, you can carry them forward to use in future tax years.**

Allows you to reinvest tax savings

At tax time, you can reinvest your tax savings and let compounding go to work. (This step is optional, but it may give you the most long-term benefit.)

See the power of automated TLH

Here's a breakdown of the average potential gains of using TLH at different frequencies.

Notes: Depicts the average TLH benefit—the difference in internal rate of returns of the baseline portfolio with and without TLH—for 15-year rolling periods, from the period starting in 1982 to the period starting in 2005 and concluding in 2019. The hypothetical portfolio is based on 400 securities contained in a risk model to create a market-cap-weighted index portfolio, similar to an S&P 500 or Russell 3000 Index portfolio. The frequency indicates how often the portfolio was scanned for harvesting opportunities, which were identified as tax lots with at least a 10% loss relative to cost basis. This analysis assumed quarterly cash flows of 5%, capital gains availability of 3% of the portfolio value, an eventual liquidation of 50%, a harvest tax rate of 40%, a liquidation tax rate of 25%, fund-level harvesting, and a relative transaction cost of 10 basis points. The model does not consider commissions, underlying product costs, or advisory fees.
Source: Vanguard calculations using data from Axioma.

How does tax-loss harvesting benefit you?

A way to keep—and save—more of your money

Tax-loss harvesting can reduce your capital gains taxes by using losses to offset gains, but it also allows you to stay fully invested and aligned with your strategy. The money you save can be reinvested, giving you the chance to greatly increase the value of the savings.

A strategic approach designed to reduce investment risk

We studied 80,000+ combinations of volatility environments and investor profiles to understand how TLH goes to work to help lower your tax bill for the year.*** Much of the benefit of tax-loss harvesting depends on when and how it's implemented. For example, using TLH on your own and across firms may increase your investment risk. We can help maximize your investment returns while working to minimize the risk of using TLH.

Part of a suite of tax strategies that can help maximize growth

By combining a smart tax-loss harvesting strategy with other tax strategies like smart asset allocation and strategic drawdown, a Vanguard advisor can help ensure you're keeping more of your money working toward your goals.

TLH benefits may fully offset the cost of Vanguard Personal Advisor SelectTM

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Source: Vanguard's research-based model for estimating the benefit created by tax-loss harvesting. The tax-loss harvesting impact is calculated as the difference in internal rate of returns (IRR) of the baseline portfolio without tax-loss harvesting and the portfolio with tax-loss harvesting. The variables used to consider a large variety of investor profiles were levels of cash flows, realized capital gains, liquidation, and tax rates. The impact shown is the median benefit. In a high-volatility 15-year market environment the model's estimate ranged from 0.51% to 1.4% and during an average level of volatility, the estimate ranged from 0.08% to 0.83%. For more information on the model, see Tax-Loss Harvesting: A Portfolio and Wealth Planning Perspective, specifically regarding the equation (Equation 4) in Appendix 3. The model assumes the tax savings from the offset of the harvested losses against realized capital gains are reinvested into the portfolio to provide compounding opportunity.

0.30% is the fee for Personal Advisor Select and Personal Advisor Wealth Management.

Note: The figures above are hypothetical estimates and do not represent the TLH benefits actually received by any client of Personal Advisor Select. The actual TLH benefits that any client may receive are highly dependent upon their particular situation. This model provides a potentially strong case for tax-loss harvesting for investors with a net worth above the 90th percentile of $1.19 million.

How tax-loss harvesting can make a difference

Let's discuss two different scenarios for the same client, Kelly, and the resulting returns for one of her investments. In one, she agrees to use TLH, and in the other, she decides not to.

In 2021, Kelly and her husband were excited to enroll in Personal Advisor Select to help prepare for their upcoming retirement in 2025. As a longtime Vanguard investor, Kelly follows Vanguard's investment principles and is eager to find a way to protect her nest egg during periods of market volatility.

Kelly uses TLH

Her advisor discussed TLH as a particularly effective strategy, so she enrolled in the service despite being hesitant to sell any portion of her savings at a loss.

One of her investments decreased in value from $30,000 to $27,000. Selling the investment at a loss of $3,000 allowed her to save 30%—or $900—in ordinary income taxes. She reinvested the $27,000 proceeds and the additional $900 in tax savings for a total of $27,900. Over the years, the investment value doubled to $55,800. After she sold the investment and paid 15% in capital gains taxes—or $4,185—the net proceeds were $51,615.

Although she was initially hesitant, she now feels more assured after using TLH to take control back from volatile markets.

Kelly doesn't use TLH

Although she's a suitable candidate for TLH, Kelly wasn't convinced about selling any part of her savings at a loss. She didn't want to lose money after working so hard to build up her nest egg. The investment doubled from $27,000 to $54,000 over the years. After Kelly sold the investment and paid 15% in capital gains taxes—or $4,050—the net proceeds were $49,950. She could have saved $1,665 with TLH.

The chart below shows Kelly's investment returns with and without TLH for the investment in her portfolio that decreased in value.

Note: This example is for illustrative purposes only and does not consider any transaction costs, costs of the underlying investments, or the impact of advisory fees.

Kelly's investment returns with and without TLH

This is just for one of Kelly's investments. Personal Advisor Select's automated TLH scans Kelly's entire portfolio periodically or in accordance with our methodology, making her potential after-tax returns much greater if losses are harvested during periods of market volatility.

Note: This case study is based on a real client scenario that has been simplified for illustrative purposes. It does not represent any actual client quotes, results, or experiences.

Consider advice

In addition to TLH, here are some additional tax strategies an advisor can use:

In-kind services

Moving your investments into the service "in kind" rather than selling them (which can trigger a large tax bill).

Tax efficiency of core holdings

Using tax-efficient investments for the core of your portfolio—including investments specifically designed to minimize taxes if you're in a high tax bracket.

Active funds

Placing any active funds and other higher-tax investments in tax-advantaged accounts to defer or eliminate those taxes.

Smart drawdowns

Drawing down your assets in tax-smart ways, including Roth conversions and charitable giving strategies.

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Frequently asked questions about tax-loss harvesting

Who could benefit

An advisor can talk with you about how much tax-loss harvesting could benefit you. Generally, you'll see the most positive impact from tax-loss harvesting if you:

  • Have money invested in taxable accounts.
  • Are in a higher tax bracket now or may be in the future.
  • Have purchased your investments at a variety of prices over time and have capital gains to offset using losses harvested by the service.
  • Must be enrolled in Vanguard Personal Advisor®.

Tax-loss harvesting limits allow you to offset up to all your capital gains with losses during the same tax year, plus up to $3,000 of ordinary income. If there are remaining capital losses, you can carry forward those losses indefinitely to offset future gains. The bottom line is that you need to have realized capital gains to offset in order to truly benefit from tax-loss harvesting.

How it works

We've done extensive research and analysis to determine an optimal methodology for tax-loss harvesting. Our automated technology scans your portfolio in accordance with our methodology to find opportunities for tax-loss harvesting in certain Vanguard ETFs, and we'll recommend selling investment lots of those ETFs that meet our research-based criteria.* 

We'll first check if your portfolio needs rebalancing. For example, before we replace a stock fund investment with another stock fund, we'll make sure your overall portfolio isn't overweighted in stocks. If it is, we'll use the proceeds from the sale to buy more of the underweighted asset class. If there’s no need to rebalance, we'll buy a surrogate Vanguard Replacement ETF††† that's similar to the sold investment but not substantially identical.

Yes. As with all aspects of investing, tax-loss harvesting comes with some risk.

  • There's a risk you may not see any benefit (or you may experience a loss) if:
    • The Vanguard surrogate funds bought with proceeds from tax-loss harvesting sales underperform the Vanguard funds sold.
    • You're in a higher tax bracket in the future.
    • You don't reinvest your tax savings, or the return on reinvestments is negative over the long term.
  • There's also the risk that your tax-loss harvesting sales may violate the IRS wash-sale rule. If you buy the same or a "substantially identical" investment within 30 days before or after you sold at a loss, you won't be able to claim the loss. We'll attempt to use investments that won't be considered substantially identical by the IRS when we're tax-loss harvesting.†† However, it's possible that transactions outside of your advised accounts could cause wash sales.

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*On days your portfolio has rebalancing or other trading activity scheduled or in progress, we'll pause checking for tax-loss harvesting opportunities. Details on which Vanguard ETFs can be harvested will be available in the Tax-Loss Harvesting Addendum to your Service Agreement that you'll discuss with your advisor.

**By nature, tax-loss harvesting results in a lower cost basis for the investments you purchase with the sales proceeds, meaning more of your investment could be subject to taxes when you sell it later. So, it's most beneficial and appropriate if you think your tax rate will be lower in the future. If it's not, you may end up deferring the taxes owed but not ultimately reducing them.

***Vanguard, Tax-Loss Harvesting: A Portfolio and Wealth Planning Perspective (PDF) (Kevin Khang, Ph.D., et al., 2020).

†Vanguard is owned by its funds, which are owned by Vanguard's fund shareholder clients. Our retail direct investment advisory strategies, in turn, are built on core investments in the Vanguard funds.

††Note that when making other non-tax-loss-harvesting trades in your portfolio in order to align with our investment methodology, we may choose to cause a wash sale in certain circumstances.

†††Details on which Vanguard ETFs can be harvested or used as Vanguard Replacement ETFs will be available in the Tax-Loss Harvesting Addendum to your Service Agreement that you'll discuss with your advisor. For more information about Vanguard funds or ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

For more information about Vanguard mutual funds or ETFs, obtain a mutual fund or ETF prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

We recommend that you carefully review the terms of the Tax-Loss Harvesting Addendum to your Service Agreement and consult a tax advisor before enrolling in tax-loss harvesting in your advised accounts. We do not provide legal or tax advice, and none of the information provided on this webpage is intended as tax or legal advice.

All investing is subject to risk, including the possible loss of the money you invest.

Vanguard's advice services are provided by Vanguard Advisers, Inc. ("VAI"), a registered investment advisor, or by Vanguard National Trust Company ("VNTC"), a federally chartered, limited-purpose trust company.

The services provided to clients will vary based upon the service selected, including management, fees, eligibility, and access to an advisor. Find VAI's Form CRS and each program's advisory brochure here for an overview.

VAI and VNTC are subsidiaries of The Vanguard Group, Inc., and affiliates of Vanguard Marketing Corporation. Neither VAI, VNTC, nor its affiliates guarantee profits or protection from losses.