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Tax Optimization and Tax Harvesting
Posted in Investment Strategy on 2014-09-24

Hedgewise offers tax optimization and tax harvesting for every client account and every product, where appropriate. These services are offered at no additional cost and with no account minimum.

Tax harvesting is the practice of trying to realize losses each year to the maximum extent possible without significantly altering your investment strategy. For example, let's say you were only invested in US stocks via an ETF which tracks the S&P 500 Index. If, at the end of the year, you had a loss on this investment, you might consider selling it and buying a slightly different ETF that still tracks US stocks, such as the Dow or Nasdaq Index. Then you would be able to realize that loss and potentially reduce your tax bill this year, without losing your exposure to US stocks.1

Wherever possible, we implement this technique while taking into account your individual tax situation and maintaining your overall desired investment exposure.

Hedgewise also offers portfolio "tax optimization", which intelligently utilizes tax-protected accounts to further reduce expected tax liability. This may be easiest to understand with an example. If a client had both an IRA and a taxable brokerage account being managed together, Hedgewise would recommend that dividend-paying assets be placed in the IRA because dividends are taxable every year. Investments that could more easily accrue tax-deferred gains would be placed in the taxable account. Hedgewise builds the expected tax implications of every investment into its recommendations and optimizes portfolios accordingly.

Footnotes

1 Hedgewise is not a tax adviser and assumes no responsibility to you for the tax consequences of any transaction. There is no guarantee that efforts to minimize taxes or to harvest losses in your account are successful. Hedgewise does not consider any of a client's personal accounts besides those which are directly under its management. This may create a conflict for tax purposes. You should confer with your personal tax adviser about all of your trading activities. Tax harvesting does not reduce your taxes, but rather shifts the tax savings to an earlier year. The primary benefit is the gain you may be able to make on that tax savings by investing it now instead of at a later date.

Note: A wash sale is a trading activity in which shares of a security are sold at a loss and a substantially identical security is purchased within 30 days. In this case, the loss may not be declared for tax purposes at that time. The IRS determines what securities qualify as 'substantially identical' and Hedgewise cannot guarantee that some of its trades do not result in a wash sale classification.

Disclosure

This information does not constitute investment advice or an offer to invest or to provide management services and is subject to correction, completion and amendment without notice. Hedgewise makes no warranties and is not responsible for your use of this information or for any errors or inaccuracies resulting from your use. Hedgewise may recommend some of the investments mentioned in this article for use in its clients' portfolios. Past performance is no indicator or guarantee of future results. Investing involves risk, including the risk of loss. All performance data shown prior to the inception of each Hedgewise framework (Risk Parity in October 2014, Momentum in November 2016) is based on a hypothetical model and there is no guarantee that such performance could have been achieved in a live portfolio, which would have been affected by material factors including market liquidity, bid-ask spreads, intraday price fluctuations, instrument availability, and interest rates. Model performance data is based on publicly available index or asset price information and all dividend or coupon payments are included and assumed to be reinvested monthly. Hedgewise products have substantially different levels of volatility and exposure to separate risk factors, such as commodity prices and the use of leverage via derivatives, compared to traditional benchmarks like the S&P 500. Any comparisons to benchmarks are provided as a generic baseline for a long-term investment portfolio and do not suggest that Hedgewise products will exhibit similar characteristics. When live client data is shown, it includes all fees, commissions, and other expenses incurred during management. Only performance figures from the earliest live client accounts available or from a composite average of all client accounts are used. Other accounts managed by Hedgewise will have performed slightly differently than the numbers shown for a variety of reasons, though all accounts are managed according to the same underlying strategy model. Hedgewise relies on sophisticated algorithms which present technological risk, including data availability, system uptime and speed, coding errors, and reliance on third party vendors.

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