Falling US bond prices may reduce investors’ taxes — CNBC

In the United States, falling bond prices amid 10-year Treasury yields near 5% may give investors an opportunity to realize losses and use them to offset gains from other investments. This approach is called tax-loss harvesting: an investor sells an asset at a loss to reduce tax liabilities, CNBC reports.

In particular, the Vanguard Total Bond Market Index Fund ETF and the iShares Core U.S. Aggregate Bond ETF have lost more than 3.5% since the beginning of the year. At the same time, the S&P 500 index has gained about 13%. Christine Larson, founder of NewSpring Wealth Partners, noted that for many clients, the bond portion of their portfolio is currently the only one showing a loss.

Asset tax basis

A fund’s negative price performance alone does not mean that selling it will generate a tax loss. To determine this, the asset’s current market value should be compared with its tax basis — the purchase price adjusted for brokerage commissions and fees.

Reinvesting dividends and interest payments increases the tax basis because the investor purchases additional shares. Advisors recommend reviewing not only the overall result for a position but also individual lots — blocks of shares bought at different times. Even when the entire position shows a gain, individual lots may still be at a loss.

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Brokerage platforms may automatically select lots to maximize losses or minimize gains. An investor may also choose them manually after reviewing tax-basis data.

Wash-sale rule

When using this strategy, investors should take into account the U.S. Internal Revenue Service’s wash-sale rule. It does not allow a loss to be used as a tax deduction if an investor buys an identical or substantially identical security during a 61-day period covering 30 days before the sale and 30 days after it.

Experts interviewed by CNBC also caution against trying to pinpoint the lowest bond price. Further rate increases may deepen losses, but long-term yields depend on market expectations for inflation, economic growth and future rates. If bond prices recover, the opportunity to realize a tax loss may diminish or disappear.