Picking open the "tax lock"

Custom SMAs use tax-loss harvesting (TLH) as an effective part of a long-term tax-management strategy.

What happens when a successful tax-loss harvesting program starts running out of losses to harvest?

Over time, embedded gains can accumulate in a portfolio, creating "tax lock" and reducing future harvesting opportunities. Our data-driven research shows how advisors may be able to combat this challenge by using ongoing cash contributions to refresh custom SMA portfolios. Learn what drives tax-loss harvesting opportunities and why cash flows can play an important role in sustaining tax-management benefits over the long term.

Frequently asked questions on custom SMAs
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What is tax-loss harvesting?

TLH is a tax management strategy that involves selling a security that has declined in value and replacing it with another security to maintain market exposure. The realized loss can then be used to offset current or future realized capital gains, reducing an investor's tax liability.

What drives tax-loss harvesting?

Market returns: When overall market performance is very strong, it can be more challenging to find tax-loss harvesting opportunities.

Market volatility: The more stocks move up and down around their trend, the more times they are apt to drop below their cost basis and present a loss-harvesting opportunity.

Dispersion of returns: The range and distribution of individual returns determine tax-loss harvesting opportunity. When all stocks in the index move together (and upwards), there is less opportunity for tax-loss harvesting than when the market performance is driven by a small subset of very strong performers.

Cost basis: The unrealized gains or losses of in-kind assets transferred into a portfolio at inception will impact later opportunities for harvesting. Stocks with a low-cost basis must fall much further from their current value to generate a loss opportunity.

What is tax lock?

Tax lock is the gradual accumulation of unrealized gains within a portfolio that reduces future TLH. Historical data shows advisors can meaningfully extend the effectiveness of a TLH strategy and help mitigate the risk of tax lock by actively refreshing the portfolio through new cash flows.