Tax Loss Harvesting (TLH) is a trading technology that utilizes features of the tax code in an attempt to reduce your tax liability. In accounts with TLH activated, we may elect to sell holdings with losses to offset any realized gains, thus lowering your tax liability.
It's commonly understood that if you sell stocks or funds that have appreciated in your taxable account, you will generally pay taxes on your capital gains. On the other hand, if you sell assets that have lost value, those losses can offset the impact of any realized gains. Our TLH program focuses on these losses.
Obviously, no one wants their positions to lose value, but in a diversified portfolio, some asset classes may increase in value while others fall. (It's exactly these offsetting gains and losses that reduce your portfolio's risk.) By selling ETFs that have declined, we allow you to recognize these losses for tax purposes. We attempt to offset any taxable gains with realized losses while maintaining portfolio's asset allocation and risk level.
By swapping specific lots of a broadly diversified asset class fund for a correlated asset class fund, SigFig can maintain your target risk exposure while realizing positions that will offset taxable gains or income. Our trading algorithm avoids the IRS wash sale rules that are tricky for individual investors to manage, but more manageable for a well-designed technological solution.