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Market volatility and proposed tax plans support the benefits of automated tax technology

For many financial advisors, tax-loss harvesting is a burdensome year-end process. It requires substantial manual effort and is often reserved for larger client accounts. This year could be especially onerous, with the gains realized as the market achieved record-breaking market highs in all major indexes in early December. But what if things could be different?

Leveraging our ActiveTax Technology®, advisors can completely automate tax-loss harvesting in a scalable manner, allowing them to better serve their entire client base and help to ensure they are capturing available loss harvesting opportunities. Tax-loss harvesting is especially timely heading into 2021, in light of potential changes to the tax landscape.

According to President-elect Biden’s proposed plans, the top individual income tax rate would increase to 39.6%. The higher the tax rate, the greater the impact of tax-loss harvesting, as short-term capital gains rates are equivalent to individual tax rates. Further, investors earning over $1 million would see their long-term capital gains rate increase from 20% to 39.6%, nearly doubling the impact of harvesting long-term losses.

With the tax landscape and market volatility in mind, here are three best practices advisors can consider to minimize tax burden for clients:

  1. Make tax-neutral progress toward portfolio objectives: It’s critical that advisors update investment strategies to reflect clients’ changing risk profiles. Yet, potentially substantial capital gains taxes often serve as a barrier. Our tax-smart transitions use intelligent automation to optimize the movement of funds, taking each client’s “tax budget” into consideration, regardless of size. As a result, it may be possible to begin to transition funds with little or no upfront taxes, then further the transition on a tax-neutral basis through the use of automated tax-loss harvesting to capture losses to offset gains that may be realized in the transition.
  2. Understand the tax implications of active or tactical strategies: Active or tactical strategies may present value for clients, but they tend to be less tax-efficient, as they frequently realize capital gains with allocation changes. Using tax-smart investing to capture losses can help offset these costs, making these strategies more cost-effective and accessible to clients.
  3. Capture losses year-round: It can be difficult, if not impossible, to predict when volatility will impact the markets. Since volatility can occur at any time throughout the year, it’s important to seize loss harvesting opportunities as they arise. Advisors using 55ip saved their clients 2.41% in the first half of 2020.

Our ActiveTax Technology® can help advisors implement these best practices by automating tax-loss harvesting and optimizing the transition of client funds. On top of all that, it provides a quarterly tax savings report for each tax-managed account. This fosters transparency, enabling advisors to quantify tax savings for clients and illustrate the value of their tax-managed strategy.

For information on partnering with 55ip or leveraging our tax-smart transition technology, contact our Advisor Success Team at (617) 960-9559 or at info@55-ip.com.


1 Estimated Average Tax Saving: Average tax saving is year-to-date in client’s accounts as a percent of average account balance as of 6/30/2020. Estimated Tax savings is the estimated after-tax dollar value added to client account portfolio due to 55ip’s proprietary tax-loss harvesting. Estimated Tax Savings is calculated by estimating the current tax bill for client portfolio, based on year-to-date realized gains and losses, and subtracting the estimated tax bill for a similar account with the same model without active tax management.

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