Seed Your Future by Lowering Your Tax Bill
Automated daily tax-loss harvesting is available, at no additional cost, for clients with $100k or more in a taxable, non-retirement account.
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- Wealthfront Account with Daily Tax-Loss Harvesting
- Wealthfront Account
- Amount Invested
Graph illustrates the potential benefits of Wealthfront’s Tax-Loss Harvesting strategy with an initial investment of $100k using hypothetical investment returns and medium risk portfolio. Disclosure
We simulated the potential after-tax benefit of our daily tax-loss harvesting service using historical results and found that it added an average of at least 0.92% annually. We used several assumptions to create one possible approximation, but did not rely on actual client trading history, and our results should not be relied upon for predicting future performance. The results are hypothetical only. These results are based on a study Wealthfront conducted for the years between January 2000 and November 2013 (described here), assuming a Wealthfront account with an initial deposit of $100,000, additional quarterly deposits of $10,000, and periodic rebalancing. Dividends and interest were not considered.A different methodology may have resulted in different outcomes. For example, we assume that an investor’s risk profile and target allocation would not have changed during the time periods shown; however, actual investors may have experienced changes to their allocation plan in response to changing suitability profiles and investment objectives. Furthermore, material economic and market factors that might have occurred during the time periods could have had an impact on decision-making. Actual investors on Wealthfront may experience different results from the results shown. There is a potential for loss as well as gain that is not reflected in the hypothetical information portrayed.
While the data used for its historical simulation are from sources that Wealthfront believes are reliable, the results represent Wealthfront’s opinion only. The return information uses or includes information compiled from third-party sources, including independent market quotations and index information. Wealthfront believes the third-party information comes from reliable sources, but Wealthfront does not guarantee the accuracy of the information and may receive incorrect information from third-party providers. Unless otherwise indicated, the information has been prepared by Wealthfront and has not been reviewed, compiled or audited by any independent third party or public accountant. Wealthfront does not control the composition of the market indices or fund information used for its calculations, and a change in this information could affect the results shown.
Wealthfront does not represent in any manner that the tax consequences described herein will be obtained or that Wealthfront’s tax-loss harvesting strategies, or any of its products and/or services, will result in any particular tax consequence. The tax consequences of the tax-loss harvesting strategy and other strategies that Wealthfront may pursue are complex and uncertain and may be challenged by the IRS.
What is Tax-Loss Harvesting?
Tax-loss harvesting is a technique used to lower your taxes while maintaining the expected risk and return profile of your portfolio. It harvests previously unrecognized investment losses to offset taxes due on your other gains and income. You can reinvest these tax savings to significantly grow the value of your portfolio.
Wealthfront developed software to make this service, traditionally only available to accounts in excess of $5 million, available to taxable accounts with at least $100k. Between 2000 and 2013, our research shows tax-loss harvesting would have increased your after-tax returns by more than 0.92% a year. Over the next 20 years that could add more than $53k to your $100k portfolio.
Is this legal?
Yes. The IRS allows tax‐loss harvesting, or “tax selling,” and financial advisors to the rich have done it manually for decades. For more about IRS allowances for capital gains and capital losses, please see the IRS website or consult your personal tax advisor.
Doesn’t tax-loss harvesting just defer tax liability?
Yes. Because the tax savings generated from tax-loss harvesting can be reinvested and compounded over time, you are almost always better off paying taxes later rather than sooner. Even if you can’t use the losses harvested in the near term, you can carry forward your losses and use them in later years.
Seems too good to be true…what’s the catch?
No catch. In addition to diversification and rebalancing, Wealthfront clients who invest at least $100k in a taxable, non-retirement account get access to tax-loss harvesting. When you activate tax-loss harvesting, Wealthfront will continuously monitor your eligible accounts to harvest losses when appropriate.
Come tax time, Wealthfront will provide you with a Form 1099. You can write off any harvested losses against your capital gains and up to $3k a year against your ordinary income. You can even carry forward any remaining losses from one year to the next.