If you’re thinking about building up your equity exposure, now may be an opportune time. But be sure to consider the most tax-efficient approach.

With the U.S. equity markets showing an upward trajectory for most of 2023, many investors started rebuilding their equity portfolios after understandably trimming during 2022 volatility. As part of our 2024 Outlook, we expect U.S. equities to continue to offer potential for gains given what we see as reasonable valuations and prospects for better corporate revenue growth over the medium-term.

Given this view – if you haven’t built up your equity exposure to levels that align with your objectives – now might be a great time to consider doing so. And with the equity markets’ natural volatility, you may want to consider pursuing an approach that is designed to react to market volatility and generate potential tax savings through "tax-loss harvesting" strategies.

These strategies are designed to give you tax-smart equity exposure – and potentially lower your ultimate tax bill – by capturing (or “harvesting”) losses that you can use to help offset capital gains. These strategies are designed to enhance tax efficiency in your equity portfolio in both up and down markets.

While most efficient in volatile markets, tax-loss harvesting is designed to help investors in various types of market environments.

Tax-loss harvesting is designed to be an effective strategy in both up and down markets for generating potential tax savings. Although bull markets may not present as many options for loss harvesting as bear markets, they can still produce meaningful opportunities for capturing tax losses. Ultimately, directionality is less important a driver than the natural, ongoing volatility of equity markets – and the dispersion of returns that they produce.

Between 2017–2023, for example, the S&P 500 returned an average of 14.9%, but the market also experienced a fair amount of dispersion among individual stock returns. In each of those years, around 170 stocks on average posted negative annual returns, creating opportunities for tax-loss harvesting.¹ The idea of volatility may give pause to investors – but this natural dispersion between top and bottom performers can also create opportunities for a loss harvesting strategy to deliver potential tax benefits for clients.

While tax-loss harvesting tends to work better in choppy, hard-to-navigate markets, this strategy can also be effective in upward-trending markets. In 2023, for example, as the “Magnificent 7”² stocks fueled U.S. stock market returns, ending up 26% for the year, there were still ample opportunities for loss harvesting within other names in the U.S. Large Cap universe and investors might have benefited from potential tax savings.³

Company names are for illustrative purposes only and may or may not be held in the portfolio at any point in time. The views presented are those of the Portfolio Manager and may differ from the views of other J.P. Morgan employees and affiliates. The examples are not an endorsement, solicitation or recommendation to purchase the security.

Capturing “tax alpha” in your equity portfolio

How, exactly, does tax-loss harvesting work?

At its simplest, tax-loss harvesting can potentially help you reduce your tax burden. It allows you to recognize losses that can then be used to offset capital gains in other parts of your portfolio. The key is that the loss must be realized, meaning you would have to sell the stock for less than its purchase price; the stock cannot remain in the portfolio. Painful as it may be in the moment, realizing losses can potentially have a meaningful, positive impact on helping you achieve your overall wealth goals.

You can still maintain your asset allocation by buying a similar stock to take advantage of any potential long-term upside. In this way, you can capture losses and use the tax relief to your benefit while keeping your portfolio aligned to your overall investment objectives. Be careful, however, not to breach the “wash sale” rule when choosing the replacement stock.

For those investors who are willing to get – and stay – invested, the potential to realize this kind of tax alpha, which is the incremental value add resulting from tax efficient management, may actually increase in years when markets turn volatile. In fact, a larger differential between rising and falling stocks tends to yield bigger potential tax savings. Even so, it’s important that when considering these strategies, you should plan in advance and consult with a tax professional to ensure alignment with your unique needs and goals.

Innovative technology enables robust tax-smart investing

Thanks to the power of technology, the harvesting of losses (and their replacement with comparable stocks) can now be done on a systematic, ongoing basis. Whereas in prior years investors may have only looked at opportunities to harvest losses at year-end, robust technology now enables us to monitor accounts daily, capturing losses throughout the year which enhances the effectiveness of tax-loss harvesting.

We can help

If you would like to know more about rebuilding your equity exposure in a tax-efficient manner, consider talking to your J.P. Morgan team. We are here to help.

KEY RISKS

The S&P 500 Index is an unmanaged broad-based index that is used as representation of the U.S. stock market. It includes 500 widely held common stocks. Total return figures reflect the reinvestment of dividends. “S&P500” is a trademark of Standard and Poor’s Corporation.

JPMorgan Chase & Co. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction. Past performance is not a guarantee of the future performance of an investment.

The impact of a tax loss harvesting strategy depends upon a variety of conditions, including the actual gains and losses incurred on holdings and future tax rates.

Tax loss harvesting may not be appropriate for everyone. If you do not expect to realize net capital gains this year, have net capital loss carryforwards, are concerned about deviation from your model investment portfolio, and/or are subject to low income tax rates or invest through a tax-deferred account, tax loss harvesting may not be optimal for your account.

The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to "stock market risk" meaning that stock prices in general may decline over short or extended periods of time.

Company names are for illustrative purposes only and may or may not be held in the portfolio at any point in time. The views presented are those of the Portfolio Manager and may differ from the views of other J.P. Morgan employees and affiliates. The examples are not an endorsement, solicitation or recommendation to purchase the security.

IMPORTANT INFORMATION

This material is for informational purposes only, and may inform you of certain products and services offered by J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). Products and services described, as well as associated fees, charges and interest rates, are subject to change in accordance with the applicable account agreements and may differ among geographic locations. Not all products and services are offered at all locations. If you are a person with a disability and need additional support accessing this material, please contact your J.P. Morgan team or email us at accessibility.support@jpmorgan.com for assistance. Please read all Important Information.