Don’t let the hot performing stock market of 2021 fool you. Odd as it may seem, some investors are sitting on losses in individual stocks or funds that have sharply declined. How can they turn their lemons into lemonade?
Tax-loss harvesting offers a fresh approach for dealing with unprofitable trades. The strategy allows investors with losing investments in a taxable brokerage account to clean up their portfolio while taking full advantage of the current tax rules.
“Tax-loss harvesting has a very real and meaningful positive impact on the after-tax return of an investor as realized losses can be used to offset gains from elsewhere in a portfolio,” said Kevin T. Carter, founder of the Emerging Markets Internet & Ecommerce ETF (EMQQ) and the Next Frontier Internet & Ecommerce ETF (FMQQ). “This will ensure that the investor maintains the exposure they are seeking but also get the tax benefit of the realized loss.”
Let’s examine a few examples of 2021 candidates for tax-loss harvesting.
Chinese Stocks And ETFs
The Chinese stock market has been hit hard in 2021 by regulatory interference, by slowing economic growth and by tense trade relations with the U.S.
“Despite another stellar year for U.S. markets, there’s plenty of opportunity to capture tax losses,” said Mike Akins, founding partner at ETF Action. “At our firm, we’re working with clients to screen holdings across emerging markets, the Asia-Pacific region and 2020 thematic winners that have experienced significant drawdowns from 52-week highs.”
One of the funds that’s been crushed by the 2021 turmoil is the KraneShares CSI China Internet ETF (KWEB); it’s one of the worst-performing emerging market funds, having fallen 43.48% year to date.
But for investors sitting on losses in the fund, not to mention individual stocks like Alibaba Group that have also been clobbered, there’s a way out.
Replacing losing China funds and stocks with Carter’s EMQQ fund offers investors exposure to the China internet sector while also allowing them participation in the growing internet and e-commerce markets in India, Brazil and other fast-growing emerging countries.
Also, investors replacing a losing Chinese stock with EMQQ will achieve broader diversification without breaking wash-sale tax rules.
The SPAC Market
A record 565 special-purpose acquisition companies (SPACs) launched this year. And while the SPAC market had a few stellar performers like Lucid Motors and Grid Dynamics, some SPACs are trading at or below their pre-merger price.