The first rule of thumb that the most successful advisors follow when efficiently and effectively tax-managing a client’s portfolio is to do so throughout the year rather than looking at tax-loss harvesting as only a year-end activity. That said, depending on the timing of market volatility, portfolio transactions that result in gains, even in the face of best laid plans - can lead to a flurry of year end activity to manage the taxable capital gains in the portfolio.

What to do, though, when the market has been going mostly in one direction throughout the year – as in 2022 – and that has been into loss territory? What if there aren’t significant realized gains that need to be offset - is this a lost opportunity? Not necessarily. This could be a time to take a look at the client’s overall portfolio allocation and ask a few questions:

1. Does your client have any legacy positions – with low cost basis – held in this portfolio or elsewhere? Now would be a great time to begin to liquidate those positions and offset some of the significant embedded gains with losses that can be realized elsewhere in the portfolio.
2. Are there any overweight positions that have grown overly concentrated (more than 5%) that should really be trimmed, but represent an unrealized gain? Again, now could be a good time to utilize losses available elsewhere to trim that back.
3. Does the allocation overall need to be tweaked or just rebalanced? A what-if rebalance (which the Vestmark tech, for example, lets you easily and efficiently run without triggering a real trade) can quickly show you what the net tax consequences would be. Then you can adjust the securities in and out of the rebalance from there.

It’s not too late to possibly make the year’s market decline work for a client’s overall portfolio for the longer term. In the worst case, if there are excess losses that can’t be offset against realized gains, $3,000 of ordinary income (whether that's dividend income from the portfolio or income from the client's paycheck) can be offset with realized losses....or carried forward for use in future years when there ARE realized gains in the portfolio.

And of course, it goes without saying that all of this presumes that we are talking about a portfolio that comprises largely individual securities – so a UMA with individual managers in at least the larger asset classes, a Rep as PM account with equities and fixed income securities, or an SMA strategy. All of this can be managed quite efficiently and effectively via the VestmarkONE® platform, so give us a call and let us show you how.

Vestmark Advisory Solutions relies on information provided by financial advisors and their investor clients in an effort to provide tax optimization services, and does not offer tax advice.