As yearend 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 will, at the very least, may not surpass 2023's figures.
"There is compelling evidence that both institutional and retail investors are leveraging recent yield volatility to book advantageous losses on the Tradeweb platform," according to Tradeweb.
"The volume of bid wanted lists on the Tradeweb platform increased throughout the fall and continued to spike in November 2024," the firm said.
This story is similar to 2023, where bid wanted lists rose throughout the fall before surging in November 2023.
The daily averages 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.
The total bid wanted lists on Tradeweb platform is about the same for November 2023 and November 2024: around 16,000, but the figure could grow as the month is not over.
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.
"When yields rise, prices of existing bonds fall, creating tax-loss harvesting opportunities," said Joel Buursma, vice president at Investortools.
Yields have fluctuated over the past two years, so tax-loss harvesting opportunities on bonds purchased since then would likely be based on timing, he said.
"Volatility creates all kinds of opportunities in the municipal space, not just for tax-loss harvesting, but for positioning and parts of the yield curve that might be undervalued or certain sectors or states that are poised to perform well going into yearend," McGregor 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.
"You could sell a security, take the loss on it, use that to offset it, roll it over into something that might not be the exact same security, but still provide you the same benefit, and lock in those tax benefits," he said.
However, with munis seeing positive returns year-to-date, there may be less tax-loss harvesting this year, Howard said.
Munis are returning positive 0.83% month-to-date and positive 1.64% year-to-date, according to the Bloomberg Municipal Index.
However, if the muni market experiences further volatility this year, there may be an increase in tax-loss harvesting, McGregor noted.
Advisors and clients have started to review their portfolios to utilize some of their losses to offset some of the gains on the equity side, especially if they have a lot of gains, said Jeff Timlin, a managing partner at Sage Advisory.
"Depending on when they put the money toward munis, they could have some opportunities to utilize [tax-loss harvesting] as a tax-efficient asset," he said.
Through tax-loss harvesting, market participants can minimize tax bills and improve their portfolio simultaneously, which McGregor calls a "double win."
Any market participant can participate in tax-loss harvesting, but it's easier to do if they have a "more liquid position," such as through mutual funds or exchange-traded funds," Howard said.
"Ultimately, if you're buying individual bonds, and you sell that individual bond, if you want to add something similar to your portfolio, there's a risk that it may not be available," he said.
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 to get those opportunities before yearend," he said. "Investors seem willing to take some gains at the start of the year and then scramble for their losses at the end of the year. It's just a seasonal trade on their behalf."
Money has flown into muni products, including separately managed accounts year-to-date, some of it right before the Fed cut, said Nick Venditti, head of Municipal Fixed Income at Allspring.
"All of that is now at a loss, and people will be excited about harvesting losses this year, which creates a lot of churn in the secondary market," he said.
