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Adam Frank

Managing Director, Head of Wealth Planning and Advice, J.P. Morgan Wealth Management

Holding investments through short-term volatility and not trying to time the market is generally prudent, but tax-loss harvesting could enhance your after-tax returns.

On screen:

 

J.P. Morgan Wealth Management.

 

INVESTMENT AND INSURANCE PRODUCTS:

  • NOT A DEPOSIT
  • NOT FDIC INSURED
  • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
  • NO BANK GUARENTEE
  • MAY LOSE VALUE

FOR ILLUSTRATIVE AND EDUCATIONAL PURPOSES ONLY.

 

All Investments involve risk, including loss of principal. There can be no assurance that any return objectives will be met. 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 carry forwards, 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. You should discuss these matters with your investment and tax advisors. Tracking error is one potential risk of a tax loss harvesting strategy. Investors considering a tax loss harvesting strategy should look at their portfolios holistically to ensure they stay on track for their overall investment goals.

 

Are Taxes Eating Up Your Investment Returns?

 

Nancy Rooney, Managing Director, Global Head of Managed Solutions.

 

Nancy Rooney:

 

Over time, taxes can erode your returns. And while taxes can't be avoided, they can be managed. And we call that being tax smart. So how do you build tax awareness into your portfolio? One way is through tax-loss harvesting.

 

On screen:

 

What's Tax-Loss Harvesting and Why Does It Matter?

 

Nancy Rooney:

 

Stocks go up and down. It's a natural part of what they do. And as an investor, you have a choice. You can ride along in that journey. And usually, holding and not trying to time the market is good. You're not a victim to the quick ups and downs of the market.

 

On screen:

 

A line on a graph of Market Volatility bounces up and down along a timeline.

 

Nancy Rooney:

 

But in the end, it may not be as tax efficient as it could be.

 

On screen:

 

Money flows from a piggy bank labeled "Returns" to a tax bill.

 

Nancy Rooney:

 

Let's say you have $100,000 invested into stock A. Over the course of the month, the price fell by 40%. When your stock has depreciated, you can now lock in that loss by selling stock A. And since you want to keep your portfolio in line with your strategy's objectives, you buy and now hold $60,000 of stock B in a very similar investment.

 

And this natural journey of ups and downs continues. All along you repeat this process and continue to pick up a bit of these tax benefits.

 

On screen:

 

A bar graph graphic depicts the sold funds as harvested losses. Other bards rise and fall under the title "Portfolio".

 

Nancy Rooney:

 

And because you're tax smart, now you're building up a reserve of losses that you can then use to offset capital gains in other parts of your portfolio, potentially resulting in a lower tax bill at the end of the year.

 

On screen:

 

Money from the harvested losses container and less from the piggy bank flow into the tax bill.

 

Nancy Rooney:

 

That is called tax alpha. It's the incremental value add resulting from tax efficient management. At JPMorgan, we implement tax-loss harvesting for you in a way that's customized and cost efficient, which essentially allows you to get exposure to broad market indices such as the S&P 500 or even certain active strategies. Our systematic approach actively looks for opportunities on a daily basis to harvest losses. We're essentially using the market's natural volatility to create potential tax savings for you.

 

Now, for investors that have high embedded gains and don't necessarily want to pay a hefty tax bill to make the switch, we offer a transition process that is unique to your preferences as well as your tax sensitivity. Taxes are a part of life. And we believe that with the right strategies, they can be managed for better outcomes. Speak to your JPMorgan team to learn more about how tax-smart strategies can add tax alpha for your portfolio.

 

That was great.

 

Yeah. Good job. Good job.

 

On screen:

 

Speak to your J.P. Morgan Team.

 

J.P. Morgan Wealth Management.

 

Important Information

 

Tax Disclosure

 

J.P. Morgan Chase and Co., its affiliates, and employees do not provide tax, legal or accounting advice. Information presented on these webpages is not intended to provide, and should not be relied on for tax, legal and accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.

 

Market Commentary and Testimonials

 

This video and its content have been developed for J.P. Morgan Securities LLC clients and prospects, is for informational and educational purposes only, and is designed to provide general market commentary and information relating to certain services offered by J.P. Morgan Securities LLC, an affiliate of JPMorgan Chase and Co. Opinions expressed herein are those of the author and may differ from those of other J.P. Morgan employees and affiliates. The information in no way constitutes J.P. Morgan research and should not be trusted as such. Further, the views expressed herein may differ from that contained in J.P. Morgan research reports.

 

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This may not be representative of the experience of other customers, and there is no guarantee of future performance or success.

 

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Depending upon the laws of the home state of the customer or designated beneficiary, favorable state tax treatment or other benefits offered by such home state for investing in 529 Plans may be available only if the customer invests in the home state's 529 Plan. Any state-based benefit offered with respect to a particular 529 Plan should be one of many appropriately weighted factors to be considered in making an investment decision, and you should consult with your financial, tax or other adviser to learn more about how state based benefits ,including any limitations, would apply to your specific circumstances.

 

J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment adviser, member FINRA and SIPC. Insurance products are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. Certain custody and other services are provided by JPMorgan Chase Bank, N.A. (JPMCB). JPMS, CIA and JPMCB are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.

 

J.P. Morgan Securities LLC, Member FINRA and S.I.P.C.

 

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Are Taxes Eating Up Your Investment Returns?


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. You should discuss these matters with your investment and tax advisors.

As many investors know, not all investments can be outperformers all the time. But there may be a silver lining: Your losses may actually help lower your tax bill thanks to a tax strategy known as tax-loss harvesting.

Of course, you should plan in advance and consult a tax professional to ensure this strategy is a good fit. Here are some considerations:

What is tax-loss harvesting?

Tax-loss harvesting involves selling securities at a loss, or in other words, securities that are currently worth less than what you bought them for. Once you sell these securities, the losses may be able to offset capital gains from other parts of your portfolio. They could also help offset gains from other capital assets you own for which you have realized, or may want to realize, taxable gain.

If done properly, tax-loss harvesting can reduce or eliminate capital gains tax on gains you realize within the same tax year. What’s more, someone with more capital losses than capital gains in a tax year can use up to $3,000 of the unused losses to offset ordinary income and can carry forward unused losses to offset future capital gains.

How tax loss harvesting works

Let's say you invested $1,000 in stock A. Over the course of a month, it loses $400 in value

Identify a loss

A dark-grey-colored rendering of a scale is depicted against a light grey background. The left side of the scale is weighed down by a maroon block with the letter ‘A’ on it in white. The header reads, “Identify a loss,” while the body text reads, “Let’s say you invested $1,000 in stock A. Over the course of a month, it loses $400 in value.

Let's say you invested $1,000 in stock A. Over the course of a month, it loses $400 in value
You sell stock A at $600 and lock in a $400 loss - this is called harvesting the loss. Then, you find a similar, not identical stock, and buy $600 of it.

Harvest the loss and invest in a similar stock

12 blocks, 10 of them colored dark grey, are depicted against a light grey background. A blue depiction of a lock extends above the top middle block, which is maroon with the letter ‘A’ on it in white. A magnifying glass hovers over the right block in row three, which is light green and has the letter ‘B’ on it in white. The header reads, “Harvest the loss and invest in a similar stock,” while the body text reads, “You sell stock A at $600 and lock in a $400 loss – this is called harvesting the loss. Then, you find a similar, not identical stock, and buy $600 of it.”

You sell stock A at $600 and lock in a $400 loss - this is called harvesting the loss. Then, you find a similar, not identical stock, and buy $600 of it.
Use your losses (e.g., $400) to offset capital gains in other parts of your portfolio. This may result in a lower tax bill at the end of the year.

Potentially lower your tax bill

A dark-grey-colored rendering of a scale is depicted against a light grey background. There is a depiction of a woman with dark, shoulder-length hair wearing a white shirt, tan pants, and brown shoes. The left side of the scale holds a maroon block with the letter ‘A’ on it in white. The woman is setting a light green block with the letter ‘B’ on it in white on the right side of the scale. The header reads, “Potentially lower your tax bill,” while the body text reads, “Use your losses (e.g., $400) to offset capital gains in other parts of your portfolio. This may result in a lower tax bill at the end of the year.

Use your losses (e.g., $400) to offset capital gains in other parts of your portfolio. This may result in a lower tax bill at the end of the year.

Beware of “wash sales”

It is possible to repurchase a security you’ve sold.  Just be careful not to trigger a “wash sale,” which will cause your loss to be disallowed in the year it is realized.

Generally speaking, a wash sale occurs when you sell a security at a loss and purchase a “substantially identical” replacement security within 30 days before or 30 days after the sale date.

If you purchase a substantially identical replacement security within this time period, the loss will be disallowed. The disallowed loss is generally added to the tax basis of the replacement security, meaning the loss will be deferred until you sell the replacement. To illustrate, if you sell stock at a loss on December 1, the wash-sale rule could be triggered if you buy a replacement security any time between November 1 and December 31. Special rules may apply in cases where some, but not all, of the shares of the original security are sold.

What is a replacement security?

A replacement security doesn’t have to be exactly identical to the security you sold to trigger a wash sale. Rather, a replacement security is deemed “substantially identical” to the security it is replacing; in other words, it’s a security so similar to the one being replaced that the IRS doesn’t differentiate between the two. Following this, a wash sale can be triggered if a replacement security is deemed substantially identical. For example, if you sell a stock at a loss, a wash sale can be triggered if you repurchase the same stock, a call option on the same stock or a number of other securities that are similar enough to be considered substantially identical to the sold stock.

To illustrate, if you sell a bond for a loss, the more different your replacement bond is (e.g., maturity date, coupon, etc.), the more likely it is that your loss will be allowed and that the replacement bond won’t trigger a wash sale. Consider consulting with your tax advisor to determine whether a replacement security may be “substantially identical” to the security you sold.

How can you remain exposed to the market without triggering a wash sale?

You can purchase a substitute that isn’t substantially identical to the security you sold. Possible substitutes may be stocks that trade similarly (e.g., you sell a consumer staples stock for a loss and purchase a different consumer staples stock to replace it), or market proxies (e.g., you sell a large-cap U.S. stock for a loss and purchase an index fund or exchange-traded fund that follows the appropriate index), so long as such substitutes are not “substantially identical.”

You can also “double up” (i.e., purchase twice as much) on the security more than 30 days before you intend to sell it – and keep the newly purchased portion – or you can wait for at least 30 days after you sell it to repurchase it. Since doubling up increases your exposure to the security for the period before you sell the loss portion, you need to be sure that this increased concentration makes sense for you.

Note that if any of the replacement securities appreciate in value, and you sell them before you have held them for over a year, any capital gains will be short-term and therefore taxed at ordinary income rates.

Getting started

There are a variety of ways in which tax-loss harvesting can be incorporated into your portfolio, whether you harvest losses on a periodic basis yourself, choose to automate the process, or work with an advisor who can implement the strategy for you. In any case, you’ll want to coordinate with your tax professional to make sure you can benefit from any method that you consider.

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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.


GENERAL RISKS & CONSIDERATIONS. Any views, strategies or products discussed in this material may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation/diversification does not guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g. equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan representative.

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