Tax-Loss Harvesting | Parametric Portfolio Associates

Tax-Loss Harvesting

At Parametric, we monitor our Custom Core^® equity and fixed income client portfolios daily – all year long – to harvest tax losses in a systematic way to help optimize value.
It’s not just saying tax management matters – a recent Cerulli report named it one of the most valuable priorities for high-net-worth investors.

Turn your losses into wins

Why systematic, year-round tax management is so important.

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Make market volatility
work for you

Harvesting losses systematically means never missing out on opportunities to offset current and future realized capital gains.

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Ease out of
concentrated positions

Have a lot of appreciated company stock? Diversifying to reduce risk means realizing some capital gains. Systematic loss harvesting in a direct indexing portfolio can help offset those gains—and reduce tax liability.

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Carry losses
forward

Even if you can’t use losses to offset realized gains in the current tax year, US tax law allows you to hold on to those losses indefinitely for use in future tax years.

Frequently asked questions

What is tax-loss harvesting?

Anytime you sell a security below its cost basis, you can use, or harvest, that loss for tax purposes to offset realized capital gains elsewhere in your investment holdings. You don’t even have to use the loss in the current tax year. You can harvest it, then carry it forward indefinitely into future tax years.

How does Parametric approach tax-loss harvesting?

Unlike other direct indexing providers, Parametric uses a trigger-based method for tax-loss harvesting, not a calendar-based method. We monitor all accounts on a daily basis but execute a loss-harvesting trade only when it provides a certain level of benefit (above and beyond transaction costs, for example), taking into account tracking error against the investor’s chosen benchmark(s), client-selected customizations, and other portfolio characteristics. Learn more about the difference between calendar- and trigger-based loss harvesting.

Can tax-loss harvesting improve returns?

Third-party research has shown that tax management can add 1%–2% in after-tax excess returns for equity and 0.3% for fixed income.^*This is known as tax alpha.

^*Shomesh E. Chaudhuri, Terence C. Burnham, and Andrew W. Lo. 2020. “An Empirical Evaluation of Tax-Loss-Harvesting Alpha.” Financial Analysts Journal 76:3, 99–108, and Andrew Kalotay. 2016. “Tax-Efficient Trading of Municipal Bonds.” Financial Analysts Journal 72:1, 48–57. These studies did not involve Parametric or its clients. There is no guarantee that a tax-management strategy will result in increased after-tax returns. Results will differ based on an individual investor’s circumstances.

When should I consider a tax-loss harvesting strategy for my clients?

High-net-worth investors may find the most value from tax-loss harvesting in a direct indexing portfolio, especially if they have—or anticipate having—realized capital gains elsewhere in their holdings. But trying to time tax-loss harvesting risks missing the bigger picture: The value of tax-loss harvesting in a direct indexing context is its always-on nature. For passive investors, capturing losses opportunistically and systematically, and not just once a year, can materially improve after-tax portfolio performance.

Can you harvest losses on bonds too?

Yes. If a bond’s price drops below its cost basis, you can sell it and harvest that loss for tax purposes. Parametric does this regularly in our laddered fixed income portfolios, selling bonds and then replacing them with those that have similar credit, yield, and maturity profiles. Learn more about tax-loss harvesting with fixed income.

What is direct indexing?

Like an index fund, direct indexing gives you passive exposure to a large number of stocks or bonds. Unlike an index fund, it’s not packaged as a single security. Instead it’s offered as a separately managed account, or SMA, and it gives you direct ownership of each individual stock or bond in the portfolio. This unlocks tax-loss harvesting at the individual security level, plus a host of other benefits, including ESG screens, blended benchmarks, factor tilts, more flexible charitable giving options, and other customizations. Learn more about direct indexing.

How do laddered portfolios work?

A constant percentage of bonds mature each year, and the proceeds are reinvested in the most attractive bonds available at the top of the ladder. We offer an online tool that simulates returns and income projections for laddered strategies in various rate environments.

More to explore

The Hidden Tax-Loss Opportunity in Today's Stock Market

Beyond Money Market Funds: A Tax Optimized Cash Strategy

Lessons Learned: Potential Pitfalls of Loss Harvesting During High Volatility