Tax-Loss SwapsImage: investopedia.com
As Director/Investments with The CR Wealth Management Group of Stifel, David Stone provides tailored, fee-based strategies that seek to enhance client asset growth. David believes in using a “four seasons” approach with his clients that incorporates tax-loss swapping strategies.
Also known as bond swapping, this approach addresses situations in which an increase in interest rates has had a negative effect on existing bond values. In scenarios where rate increases have left bonds with a value below what was paid for them, a bond swap portfolio upgrade can be undertaken.
This strategy involves selling the bonds at a loss as a way of accessing a capital-gains tax offset tied to the sale of holdings that have appreciated. Money received can then be reinvested in bonds that may offer advantages, such as preferred maturity date, better credit quality, and higher yield.
There are many aspects of tax-loss swaps that should be considered, including whether the capital gains realized are on a short-term or long-term basis, which determines the applicable tax rate. Another consideration is the IRS’s wash sale rule, which prohibits losses that are recognized on security sales should a “substantially identical” security be purchased within a 30-day period either side of the transaction. Investors should also consult with their tax advisor.
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