You should carefully read this disclosure and consider your personal circumstances before deciding whether to utilize Betterment’s Tax Loss Harvesting+ (“TLH+”) feature. For details on the operation of TLH+, you should also read our TLH+ white paper.
You are solely responsible for determining whether to use TLH+ and whether you would benefit from doing so. You retain that responsibility notwithstanding any general guidance that Betterment may provide based on a hypothetical tax rate. The benefits of TLH+, if any, in reducing an investor’s tax liability will depend on the investor’s entire tax and investment circumstances, including but not limited to: their income, state of residence, the purchases and dispositions of assets in the investor’s (and their spouse’s) accounts outside of Betterment, type of investment accounts held, and applicable investment holding periods. You can opt in or out of TLH+ at any time by going to the “Settings” page and clicking on “Accounts.”
TLH+ is not suitable for all investors. Investors whose circumstances typically make TLH+ unsuitable for them include, but are not limited to: (1) those in relatively low income tax brackets, and especially those who expect to be subject to higher tax rates in the future, (2) those who are planning to withdraw a large portion of their taxable assets within the next 12 months, and (3) those who trade (or whose spouses trade) any of the ETFs in the Betterment portfolio (or substantially identical securities) in external accounts, including joint accounts. Other issues may exist that could materially impact the utility of TLH+ for any individual investor. Clients who use TLH+ should typically turn off the feature at least 12 months in advance of any withdrawal of a large portion of their taxable assets. Clients who do not have any taxable accounts will not benefit from the operation of TLH+.
The wash sale rule disallows the realization of a loss from selling a security if a “substantially identical” security is purchased 30 days before or after the sale. The wash sale rule applies not just to situations when a “substantially identical” purchase is made in the same account, but also when the purchase is made in a different account or even the account of a spouse. In general, TLH+ seeks to avoid potential wash sales that could arise from transactions in different securities that track the same index. TLH+ cannot, however, avoid potential wash sales arising from transactions in tickers that track the same index where one of the tickers is not currently a primary, secondary, or tertiary ticker (as those terms are defined in the TLH+ white paper). This situation could arise, for example, when other tickers are transferred to Betterment or where they were previously a primary, secondary, or tertiary ticker.
TLH+ is not able to avoid wash sales associated with accounts that are held outside Betterment (“external accounts”), including external accounts that clients have linked to their Betterment accounts via Betterment’s online interface. Clients who enable TLH+ are responsible for monitoring their external accounts to avoid any such wash sales. Situations where such a purchase could occur include, but are not limited to, dividend reinvestments and purchases of securities with the proceeds from a liquidated Betterment account. A wash sale could also occur where securities in an account held outside Betterment are sold at a loss and used to fund a Betterment account. Wash sales where the replacement security is purchased in an IRA account are particularly worth avoiding. That is because, in general, a “washed” loss is postponed until the replacement securities are sold, but if the replacements are purchased in an IRA account, the loss is permanently disallowed.
Betterment will not coordinate with trust accounts that clients have opened at Betterment unless specifically instructed to do so. You can contact firstname.lastname@example.org to begin this process. Betterment will coordinate TLH+ across your and your spouse’s Betterment accounts after you have linked your spouse’s Betterment account. You can link your spouse’s Betterment account by clicking on “Manage” on the Summary page.
When Betterment replaces investments with “similar” investments via TLH+, it does so by purchasing investments that are expected, but are not guaranteed, to have similar performance and risk exposure. Expected returns and risk characteristics are no guarantee of actual performance. The performance of the new investments purchased by Betterment may be better or worse than the investments that were replaced. Clients may also incur higher fund-level fees in the replacement investments. The enablement of TLH+ will typically result in a higher number of trades than would occur in a similar account without TLH+ enabled. This could result in additional transaction costs (e.g., bid-ask spread expense) associated with trading. In some cases, the replacement securities may also be less liquid, which could also result in increased transaction costs.
Betterment does not represent in any manner that TLH+ will result in any particular tax consequence or that specific benefits will be obtained for any individual investor. The TLH+ service is not intended as tax advice. Please consult your personal tax advisor as to whether TLH+ is a suitable strategy for you, given your particular circumstances. The tax consequences of tax loss harvesting are complex and uncertain and may be challenged by the IRS or any other tax authority. The internal revenue code, as well as judicial and administrative interpretations of it, are subject to change and any such change could have a material impact on the consequences of using TLH+. State income tax laws are also subject to change and may differ from federal law in material ways. There is limited authority governing whether an ETF is “substantially identical” to another ETF for the purposes of the wash sale rule. Accordingly, there can be no assurance regarding how the IRS would resolve this question in specific contexts.
You and your tax advisor are responsible for how transactions conducted in your account are reported to the IRS, or any other tax authority, on your personal tax return. Betterment assumes no responsibility for the tax consequences to any client of any transaction associated with TLH+.
Electing different portfolio strategies for multiple Betterment goals may cause TLH+ to identify fewer opportunities to harvest losses than it might if you elect the same portfolio strategy for all of your Betterment goals. Investors with assets held in different portfolio strategies should understand how it impacts the operation of TLH+. To learn more, please see Betterment’s Socially Responsible Investing Portfolio Disclosure, Flexible Portfolios Disclosure, the Goldman Sachs Smart Beta Disclosure, and the BlackRock Target Income Portfolio Disclosure for further detail. Clients in Advisor-designed custom portfolios through Betterment for Advisors should consult their Advisors to understand the limitations of TLH+ with respect to any custom portfolio. Additionally, as described above, electing one portfolio strategy for one or more goals in your account while simultaneously electing a different portfolio for other goals in your account may reduce opportunities for TLH+ to harvest losses due to wash sale avoidance.
Due to Betterment’s monthly cadence for billing fees for advisory services, through the liquidation of securities, tax loss harvesting opportunities may be adversely affected for customers with particularly high stock allocations, third party portfolios, or flexible portfolios. As a result of assessing fees on a monthly cadence for a customer with only equity security exposure, which tends to be more opportunistic for tax loss harvesting, certain securities may be sold that could have been used to tax loss harvest at a later date, thereby delaying the harvesting opportunity into the future. This delay would be due to avoidance of triggering the wash sale rule, which forbids a security from being sold only to be replaced with a “substantially similar” security within a 30 day period.