As year-end approaches, investors have traditionally turned to tax-loss harvesting to use some of their losses to offset gains. However, this year may see less of the tactic than in previous years due to the strength of the muni market.
Investors use tax-loss harvesting to sell investments at a loss to lower taxes, with the losses usually used to offset gains.
Data suggests that tax-loss harvesting this year may not surpass 2023's figures.
The daily average month-to-date for November 2024 activity is trending very similarly to the November 2023 activity — given the nature of clients utilizing tax loss harvesting strategies around this time every year, Tradeweb said.
Furthermore, October 2023 — a month in which munis sold off considerably — saw a higher daily average of 14,638 compared to October 2024 at 13,868.
That volatility last year played a role in the prevalence of tax-loss harvesting, said Tim McGregor, a Managing Partner at Riverbend Capital Advisors.
"Volatility creates all kinds of opportunities in the municipal space, not just for tax-loss harvesting, but for repositioning on parts of the yield curve that might be undervalued or certain sectors or states that are poised to perform well going into year-end," he said.
When munis saw greater losses, it made sense to engage in tax-loss harvesting, said Cooper Howard, a fixed income strategist at Charles Schwab.
"However, with munis seeing positive returns year-to-date, there may be less tax-loss harvesting this year”, Howard said.
“If the muni market experiences further volatility this year, there may be an increase in tax-loss harvesting”, McGregor noted.
Through tax-loss harvesting, market participants can minimize tax bills and improve their portfolio simultaneously, which McGregor calls a "double win."
“Market participants tend to utilize tax-loss harvesting toward the end of the year”, McGregor said.
"You tend to go through the portfolios and all asset classes and see what type of losses might be available to get those opportunities before year end," he said. "Investors seem willing to take some gains at the start of the year and focus on their losses at the end of the year. It's just a seasonal trade on their behalf."