Tax Lot Selection Methodologies Disclosure

Advisors selling a specific position to rebalance their client’s portfolio are able to elect a tax lot selection methodology when initiating the transaction in a taxable account. The tax lot selection methodology controls which specific shares (or tax lots) of a security are sold in a transaction, which directly affects the amount and character (short-term versus long-term) of any gain or loss a client realizes. Advisors making such an election should review this disclosure carefully and are responsible for communicating this information, as necessary, to their clients. Advisors, and their clients, are solely responsible for initiating any transaction and evaluating and confirming the tax consequences of tax lot selection before initiating a transaction.

Betterment’s default tax lot selection methodology for taxable accounts follows a set of rules designed for tax efficiency that we call “TaxMin” (as further described below), unless an Advisor selects a different tax lot selection approach. Advisors should select a methodology based on their clients’ individual tax circumstances and preferences (e.g., the client’s tax bracket, expected future tax rates, and other realized or unrealized gains and losses). Advisors, not Betterment, are responsible for selecting the methodology best suited to each client on a transaction-by-transaction basis.

Betterment does not guarantee that any methodology will minimize a client’s taxes, produce a particular tax result, or prevent gains or losses. The tax efficiency of a methodology varies based on the client’s individual tax circumstances, the details of the transaction, and the information available to Betterment (in particular, securities with Non-covered and Missing/Unknown Lots will impact the efficacy of each methodology, as described below). Actual tax impact will depend on the client’s available lots, individual tax circumstances, and transaction history, including transactions both on and off the Betterment platform.

Available methodologies

• TaxMin: TaxMin is designed to generally reduce the tax impact of a transaction by prioritizing losses before gains and selecting lots in the following order: (i) lots reflecting short-term losses, beginning with lots that generate the greatest short-term loss and proceeding to the least short-term loss; (ii) lots reflecting long-term losses, from the greatest long-term loss to the least long-term loss; (iii) lots reflecting no gain or loss; (iv) lots reflecting long-term gains, from the least long-term gain to the greatest long-term gain; and (v) lots reflecting short-term gains, from the least short-term gain to the greatest short-term gain. TaxMin is Betterment’s default tax lot selection methodology when processing trade orders for taxable accounts, including client initiated transactions and transactions associated with proactive rebalancing and other portfolio management activity. For more information about TaxMin, see Betterment’sTaxMin whitepaper.
• Harvest Gains: Harvest Gains is a strategy that generally seeks to realize gains in a tax-efficient manner. Harvest Gains selects lots in the following order: (i) lots reflecting long-term gains; (ii) lots reflecting short-term gains; (iii) lots reflecting no gain or loss; (iv) lots reflecting long-term losses; (v) lots reflecting short-term losses; and (vi) Non-covered and Missing/Unknown Lots (as defined below). In short, Harvest Gains is similar to Tax Max, but will prioritize selling lots with long-term capital gains first, whereas Tax Max prioritizes lots with short-term capital gains first. Harvest Gains can be useful in limited circumstances when a client intentionally wants to realize gains, particularly long-term gains, as part of a broader tax-planning strategy.

• FIFO (First in, first out): FIFO sells the oldest shares first based on their purchase date, without regard to whether a particular lot would generate a gain or loss or otherwise reduce the tax impact of the sale. If the oldest available shares have been held for more than one year, FIFO will result in the realization of long-term gains or losses. If the oldest available shares have been held for one year or less, FIFO will instead result in short-term gains or losses.

• LIFO (Last in, first out): LIFO sells the most recently purchased shares first based on their purchase date, without regard to whether a particular lot would generate a gain or loss or otherwise reduce the tax impact of the sale. Because recently purchased shares are often held for one year or less, LIFO can result in the realization of short-term gains or losses.

• TaxMax: TaxMax is designed to maximize tax impact by selecting lots in the following order: (i) lots reflecting short-term gains, beginning with lots that generate the greatest short-term gain and proceeding to the least short-term gain (and including Non-covered and Missing/Unknown Lots (as described below)); (ii) lots reflecting long-term gains, from the greatest long-term gain to the least long-term gain; (iii) lots reflecting no gain or loss; (iv) lots reflecting short-term losses, from the least short-term loss to the greatest short-term loss; and (v) lots reflecting long-term losses, from the least long-term loss to the greatest long-term loss. Advisors should be aware that TaxMax prioritizes short-term gains and therefore will likely result in a higher tax impact than other methodologies. TaxMax can be useful in limited circumstances when a client intentionally wants to realize short-term gains (for example, when the client can recognize gains at a low or 0% tax rate, or otherwise prefers to recognize short-term gains in the current tax year as part of a broader tax-planning strategy). Advisors should use additional caution in selecting TaxMax for a position that includes Non-covered and Missing/Unknown Lots, due to the treatment described in "Non-covered and Missing/Unknown Lots" below, and should be aware that Betterment is more likely to select such lots under TaxMax, especially where there have been recent ACATs transfers (within the last year) to Betterment in that position.

Non-Covered and Missing Lots:

Securities can include tax lots for which Betterment does not have complete cost basis or purchase-date information (collectively, “Non-covered and Missing/Unknown Lots”). Non-covered and Missing/Unknown Lots arise from a number of circumstances, including, but not limited to, transfers (ACATS or otherwise) where the delivering firm did not transmit cost basis (often because the original lot was itself noncovered, there has been a delay in the cost basis information transfer, or the transfer was non-standard), gifts and inherited securities, certain corporate actions that fail to carry basis, securities purchased before the relevant covered effective date (e.g. equities purchased prior to January 1, 2011), and other instances where cost basis is missing or unverified. Where Betterment does not have complete cost basis or purchase-date information for a lot, Betterment will, depending on the information missing, assign that lot a purchase date of the date the shares were received on the Betterment platform and/or a cost basis of $0. This default assignment can result in Non-covered and Missing/Unknown Lots being sold as short-term gains, particularly under a TaxMax or LIFO selection. As a result, Non-covered and Missing/Unknown Lots limit the effectiveness of a tax lot selection methodology and impact which tax lots are sold. Betterment’s tax impact preview feature will also be incomplete or inaccurate if the security position to be sold includes Non-covered and Missing/Unknown Lots.

Advisors should use caution when initiating a sale of a security that includes Non-covered and Missing/Unknown Lots, particularly when the potential tax consequences of lot selection are material. Advisors should review a client’s available cost-basis information to identify any Non-covered and Missing/Unknown Lots by visiting the client’s Household Overview, selecting the Taxes tab, and selecting Cost Basis reports within the Betterment account interface. Advisors, and their clients, are solely responsible for initiating any transaction, including any transaction involving Non-covered and Missing/Unknown Lots, and evaluating and confirming the tax consequences of tax lot selection before initiating a transaction.

Cost-basis information, including for Non-covered and Missing/Unknown Lots, can be updated after a transaction, including as a result of transfers or return of capital or other account activity. Advisors should use caution when initiating a sale of a security close in time to its transfer to the Betterment platform, where it is more likely that cost basis information is delayed from the previous delivering firm. Tax impact previews are taken as point in time snapshots based on Betterment’s available information, and do not reflect cost basis information that is subsequently received by Betterment.

Other Considerations

When a transaction results in the sale of an entire holding in a taxable account, such as a full withdrawal or certain portfolio strategy changes, the tax lot selection methodology may not affect the outcome because all lots of that holding will be sold as part of the transaction regardless of the methodology selected.

Betterment is not a tax advisor. The tax lot selection methodologies described above, and any related tax impact previews, are estimates and educational in nature and are not intended as tax advice. Advisors and clients should consult a qualified tax advisor regarding their specific tax circumstances.