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How much did you know about tax-loss harvesting?

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      By Brian Langstraat, CFAChief Executive Officer, Parametric

      Seattle - To wrap up our exercise in lore harvesting to advance our understanding of loss harvesting, here are the answers to the six true-or-false questions that I posed in my previous blog:

      1. It doesn't matter when you harvest losses in a portfolio as long as you do it before the end of the year.

      False: Harvesting losses effectively means doing it continuously — all year round and not just at the end of the year, by which time key opportunities may have already been missed.

      1. Tax-loss harvesting opportunities shrink over time.

      True: Over time, especially under bull-market conditions, a portfolio can eventually become highly appreciated and there may be fewer losses to harvest. The value of tax losses comes from their ability to offset capital gains and defer those taxes into the future. When the gain is eventually realized, it could qualify for the lower long-term tax rate. And don't forget about estate planning, charitable gifting and other ways to continue to reduce even highly appreciated portfolios' tax liability.

      1. You can't harvest a loss and maintain the same market exposure at the same time without violating the IRS's wash-sale rules.

      False: You can sell a security at a loss, then immediately purchase a similar security that may, from a risk perspective, match the security you sold. To comply with IRS rules, however, you and your tax advisor must make sure you don't buy a substantially identical security within 30 days before or after that transaction.

      1. Harvesting losses works the same way in an SMA as it does with an ETF or mutual fund.

      False: You can harvest a loss in an ETF or mutual fund only if the value of your investment in that fund falls below your cost basis. With the type of separately managed account where the investor owns the underlying securities (not exclusively funds), you can unlock the loss-harvesting potential of each individual stock.

      1. You can harvest losses in your equity portfolio to offset gains in other holdings, such as real estate.

      True: If investors have capital gains elsewhere — in hedge-fund investments and other holdings — those gains can, with some restrictions, be offset by the losses harvested in their equity portfolios. Depending on your situation, they could even offset ordinary income under certain circumstances.

      1. You can harvest losses even when the market is rising.

      True: Even when the market is broadly up, certain stocks may be down. For example, in 2017, a year when the S&P 500® Index saw a total gain of close to 22%, 122 names in the index showed a loss for the year. If you are invested in an SMA where you have access to the individual underlying stocks in the portfolio, those losses could be harvested to offset gains elsewhere.

      Bottom line: If any of the answers surprised you, that's OK — they may surprise many who are new to tax-loss harvesting or aren't fully sure how it works. My hope is that, armed with more knowledge, we can all make decisions based not on lore but on good, sound investment science.

      tax forward