and simultaneously buying a similar bond to benefit your portfolio
– Modifying quality / credit rating
– Modifying yield
– Modifying price
– Modifying call protection
– Protecting a gain
– Protecting a loss
– Tax-Loss Harvesting to offset gains (for tax purposes)
– Taking advantage of changes in the yield curve (interest rate market)
– A wash-sale; A wash-sale violation involves buying back a substantially similar security within 30 days effectively negating the realized capital loss for tax purposes.
– The issuer / name of the security
– The coupon / interest rate paid
– The maturity / life of bond
Short-term losses can only offset short term gains and they are taxed as ordinary income. A short-term bond is defined as having been held for less than 12 months.
Long-term losses can only offset long term gains and are subject to any associated long-term taxes. A long-term bond is defined as having been held for more than 12 months.
Example* of Tax-Loss Harvesting using Bond-Swapping:
Sue has 100m bonds she purchased at par (100% or $1,000 each) totaling $100,000. These 100 bonds are currently worth 95 totaling $95,000. As a result, Sue has a loss of $5,000 within her bond portfolio.
In Sue’s stock portfolio, she purchased 500 shares of company Y at $40, totaling $20,000. Sue later sold the same shares of company Y at $50, totaling $25,000. Sue experienced a $5,000 gain.
To use “Bond Swapping” to benefit her portfolio, Sue can sell the bonds which are currently worth $5,000 less than the original purchase price of $100,000, realizing the loss. Then Sue purchases similar bonds at 95–maintaining the same price for this particular scenario–making sure 2 of the 3 characteristics change. Effectively, Sue just: 1) performed a bond swap 2) realized a tax-loss which offsets the stock gain and 3) all without compromising her portfolio.
IMPORTANT: IRS rules limit the amount of deductions that can be taken and/or offset, and gains and losses must both occur in the same calendar year. However, carry-forward losses may also be available. Losses in a qualified or retirement account may not be used. The information provided here relates only to investment advice and does not replace or serve as professional tax advice. Please consult a qualified tax advisor regarding any questions you may have, as tax implications and benefits vary.