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Most investors expect to feel the sting of capital gains taxes on earnings at the end of an “up” year. But during the past year, there were many investors who, despite disappointing results, were not spared. The painful truth is that data shows many funds still distributed taxable gains at levels similar to 2014 despite low market returns.

While it is impossible to go back in time, investors can do better starting now and throughout the year, using the volatility currently seen in the markets to harvest losses, and take an active after-tax perspective with their portfolios. Loss harvesting is the practice of selling investments held at a loss. Tax losses can be used to offset capital gains generated by mutual fund holdings, sale of real estate or from the sale of stock.

While many investors wait until year end to harvest losses, it is important to regularly monitor portfolios for harvestable losses. This helps ensure that tax management opportunities are fully captured and banked as they become available, rather than risking that they dissipate before the end of the year.

When harvesting losses, it is important to be aware of potential wash sales. A wash sale is triggered when an asset is sold at a loss and a “substantially identical” security is purchased within 30 days. A wash sale results in the disallowance of the tax loss. Investors hoping to maintain their market exposure while taking advantage of tax losses face the challenge of finding a suitable but substantially different replacement investment. Investors who currently use index funds or ETFs for the core of their portfolio can replace this exposure with an index-based tax-managed separately managed account for additional tax efficiency.

A tax-managed separate account (SMA) can be designed to seek index returns similar to those of an ETF or mutual fund, but with the added potential benefit of excess realized losses. Unlike mutual funds, SMAs can pass capital losses through to the individual investor on an ongoing basis.

Tax-managed index style accounts seek: (1) to track a selected index; and (2) to produce a tax benefit through excess realized losses. As an example, consider tax-managed portfolio benchmarked to the Standard & Poor’s 500 Index. Initially, the portfolio is invested in about 250 securities selected to track the whole index. The securities and weights in the portfolio are selected such that it very closely resembles the index in terms of sector and industry weights. Care is also taken to ensure that the portfolio lines up against the index in terms of risk factors like expected yield, beta and market capitalization. After the initial portfolio is invested, it is continuously monitored for risk and tax-loss harvesting opportunities.

In a diversified portfolio of 250 securities, some equity prices will inevitably rise and some will fall. The names that go down in value present loss harvesting opportunities. When such opportunities occur, the portfolio can be loss harvested. The tax lots experiencing a loss are sold, and a replacement set of securities is bought. Care is taken not to violate wash sale rules. The intended result is a portfolio that continues to closely track the index while also producing excess realized losses.

Losses realized by a tax-managed index portfolio can also be used to offset gains that exist elsewhere in the investor’s overall portfolio, whether generated from the investor’s active manager investments, hedge fund investments, or sale of real estate or concentrated stock.

Year-round tax management of investors’ portfolios is a great way to take advantage of market volatility by harvesting losses. Tax losses can come in handy when other investments such as mutual funds distribute gains. While investors may be surprised by mutual fund gain distributions from last year, now is the time to start thinking of strategies to help your clients keep more of the money they earn this year.