Treasury yields reached their highest levels in 24 years this week, driving down bond prices and leaving some investors with unrealized losses. For those holding individual bonds, bond mutual funds, or exchange-traded funds in taxable brokerage accounts, this market environment may present a tax-planning opportunity through a strategy known as tax-loss harvesting.
Tax-loss harvesting involves selling an investment at a loss and using that realized loss to offset capital gains elsewhere in a portfolio. Financial advisors note that reviewing taxable fixed-income holdings now, rather than waiting until year-end, may provide investors with more flexibility and options. Investors should examine their bond holdings across all accounts to identify positions that could be sold at a loss.
However, investors must navigate the IRS wash-sale rule, which prohibits claiming a tax loss if the same or a substantially identical security is purchased within 30 days before or after the sale. This rule applies across all account types, including retirement accounts. While this restriction requires careful planning, experts indicate that investors may be able to transition to different fixed-income investments that align with their goals without violating the rule, though consulting a tax professional is advisable.
Tax-loss harvesting may not be appropriate for all investors. Those holding a ladder of individual bonds and planning to hold them to maturity may have no need to sell, as they can reinvest proceeds into higher-yielding issues as bonds mature. For other investors, higher yields present an opportunity to reassess their fixed-income allocation and overall portfolio balance, considering factors such as time horizon, income needs, interest-rate risk, and diversification. Experts caution that investors should weigh transaction costs and tax consequences before executing any trades, ensuring that tax considerations support rather than drive investment decisions.
Article Attribution | Read More at Article Source
Article summary produced by Claude AI