Those who were a little off with their investment timing this year can still find a silver lining by utilizing a number of similar asset-class exchange traded funds to implement a tax loss harvesting strategy.
For instance, the MSCI EAFE Index, which tracks developed Europe, Australasia and Far East, has declined over 5% in the past three months and dipped about 2% over the past year.
“If your international investments have lost money this year, you may be looking to harvest losses to offset potential capital gains in other areas,” according to a ProShares research note.
If an investor has a international fund position that saw a negative return, one can sell the investment and realize a loss for tax purposes or offset taxable income. However, you might miss out on any rebound rally ahead.
ETFs are a great way for investors to capitalize on the tax-loss harvesting strategy if they do not want to be out of the market. To maintain exposure to the international equities, an investor could buy an ETF that tracks similar international exposure after selling the original international position for tax purposes. [Tax Loss Harvesting: What You Need To Know]
However, investors need to be aware of the “wash-sale” rule. Investors cannot claim the loss if they buy a “substantially identical” security within 30 days of the sale. The IRS, though, hasn’t provided a hard definition of “substantially identical,” and investors should consult a tax advisor about the wash-sale rule.
As a way to make meet the regulatory rules, many financial advisors utilize the tax-loss harvesting strategy featuring ETFs that track the same market segment but pegged to different indices.
For instance, the ProShares MSCI EAFE Dividend Growers ETF (NYSEArca: EFAD), which follows the MSCI EAFE Dividend Masters Index and includes developed market EAFE companies that exhibit a minimum dividend increase streak of 10 years, may be a used as a suitable ETF alternative to MSCI EAFE Index funds for a tax-loss harvesting strategy.
According to ProShares, EFAD may act as an alternative to other U.S. open ended foreign large-blend or U.S. ETF foreign large blend categories.
For more information on ETFs and taxes, visit our taxes category.
Max Chen contributed to this article.