How does Tax Impact Preview work?

Selling shares is a taxable event—those sales could be triggered by a withdrawal or an allocation change. Tax Impact Preview shows the estimated gains and losses the sale is expected to realize, as well as an estimate of the taxes that may result, in real-time, before the transaction is carried out.

When initiating a withdrawal amount on the Transfer tab or adjusting the allocation slider on the Advice tab, the estimated tax impact will appear, giving you access to a summary of the short- and long-term gains and losses expected to result from the sales.

Tax Impact Preview generates this estimate by “pre-playing” the transaction to simulate the trades that will take place across all of the ETFs that you hold.

To determine those trades, our algorithms first check whether each asset class is over or underweight by comparing your current allocation to your target allocation. The amount of bonds and stocks to sell is determined in a way that brings each asset class back to the portfolio’s target allocation.

Once the specific ETFs and amounts to sell have been determined, Betterment’s algorithms use the TaxMin accounting method to select the specific lots that will be sold. For each ETF, TaxMin selects losses first and short-term capital gains last in order to minimize the tax impacts.

Tax Impact Preview sums up all the losses and gains that are expected to be realized across the different ETFs and tax lots. If your losses outweigh your gains, Tax Impact Preview will estimate your realized losses. If your gains outweigh your losses, estimated taxes owed will be displayed.

The estimated tax is an upper bound, meaning it assumes the highest applicable tax rates of combined federal, state, and medicare surtax. Actual taxes are likely to be different depending on specific circumstances, including, but not limited to, the marginal tax rate applicable to you, any subsequent trading activity, the presence of other capital gains or losses for the year, and securities prices at the moment your execute the trades.

Tax Impact Preview is just an estimate, since it depends on the current prices of each ETF, which won’t necessarily be the price at the time you trade. However, it will give you a good idea of the impact of the transaction. Tax Impact Preview is not tax advice.

Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.