Business 4 min read By Alice Ashford
Investor books $90,000 in losses by swapping funds for a week to avoid capital-gains tax
A US investor who sold nothing during the 2022 market crash has avoided capital-gains tax by swapping into a similar fund for a week, booking $90,000 in losses. The strategy, known as tax-loss harvesting, allows investors to offset gains while maintaining market exposure.
A US investor who held his positions through the 2022 market crash has found a way to sidestep capital-gains tax without selling his core holdings. By swapping into a similar fund for just one week, he booked $90,000 in losses and has not paid capital-gains tax since, according to a report from Yahoo Finance.
The strategy, known as tax-loss harvesting, involves selling an investment at a loss and immediately purchasing a substantially similar fund to maintain market exposure. The investor, who sold nothing during the downturn, used the temporary swap to realise losses that could be used to offset future capital gains, effectively resetting his tax liability.
Tax-loss harvesting is a legal technique widely used by wealth managers and individual investors to reduce taxable income. The key requirement is avoiding the IRS wash-sale rule, which disallows a loss deduction if the same or substantially identical security is purchased within 30 days before or after the sale. By switching into a similar but not identical fund, the investor preserved his market position while locking in the tax benefit.
The approach has gained attention as markets have become more volatile and investors look for ways to manage their tax exposure. In the UK, where capital-gains tax rates have risen in recent years, similar strategies are available through the use of share classes and exchange-traded funds, though the rules differ from those in the United States.
Financial advisers note that tax-loss harvesting works best for investors with significant unrealised gains or those who expect to sell assets in the future. The technique can be repeated year after year, allowing investors to build up a pool of losses that can be carried forward indefinitely in the US system.
The investor in question has not disclosed the specific funds he used, but the strategy typically involves index funds or ETFs that track the same benchmark. For example, an investor holding an S&P 500 fund might switch to a different S&P 500 fund from another provider, or to a total-market fund, to avoid triggering the wash-sale rule.
Critics of aggressive tax-loss harvesting argue that it adds complexity and trading costs, and that the benefits are often overstated for smaller portfolios. However, for high-net-worth individuals with substantial holdings, the savings can be significant. In this case, the $90,000 in losses would offset an equivalent amount of capital gains, potentially saving tens of thousands of dollars in tax.
The practice has become more common as online brokerages have introduced automated tax-loss harvesting tools for retail investors. These tools monitor portfolios and execute trades automatically to capture losses while keeping the portfolio aligned with its target allocation.
For UK investors, the equivalent strategy involves using the annual capital-gains tax allowance, which currently stands at £3,000 per individual. Losses can be carried forward to offset future gains, and investors can switch between similar funds without triggering a taxable event if they hold the new fund for at least 30 days before selling it at a gain.
The investor's approach highlights the growing sophistication of tax planning among retail investors, who are increasingly using techniques once reserved for professional money managers. While the strategy requires careful attention to rules and timing, it offers a legitimate way to reduce tax bills without abandoning investment positions.
