Tax Loss Harvesting Disclosure

You should carefully read this disclosure and consider your personal circumstances when determining whether to retain or disable Betterment’s TLH feature. For details on the operation of TLH, you should also read our TLH white paper. This disclosure also contains information about the calculation and assumptions used in Betterment’s personalized estimated tax savings tool, which you can locate in your account online.

1. Tax Loss Harvesting

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 your reported income and 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, (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, and (4) those who can currently realize capital gains at a 0% tax rate. 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 reduce potential wash sales that could arise from transactions in different securities that track the same index. TLH cannot, however, reduce 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.

When you elect to enable TLH, such an election applies to your taxable legal account, meaning that all taxable goals associated with that taxable legal account (i.e., individual or joint account) will have TLH enabled. You are not able to elect TLH for some but not all goals within a legal account. If you have an individual taxable legal account and your spouse has an individual taxable legal account (rather than joint) account with Betterment, TLH will not consider transactions in your spouse’s individual account for purposes of reducing wash sales unless you have created a Household with which both individual accounts are associated. If you want Betterment to consider transactions in your spouse’s account, you should create a household by reaching out to support@betterment.com to ensure Betterment can coordinate trades (and helps reduce wash sales) across both your and your spouse’s accounts.

Betterment will only coordinate with SSN-based trust accounts that clients have opened at Betterment. EIN-based trust accounts will not be coordinated unless Betterment is specifically instructed to do so. 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 visiting the "Connected accounts" section of your Betterment summary.

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. Betterment has calibrated TLH in a way that Betterment believes optimizes its effectiveness given expected future returns and volatility. That means that TLH does not harvest every unrealized loss, and that losses are harvested based on a number of factors; however, other calibrations could result in more frequent harvests, especially in highly volatile markets. You should also be aware that during times of elevated market volatility, there could be substantial movements in market price in the time between the algorithm’s identification of the trade and trade execution, such that TLH results in the inadvertent realization of short-term capital gains rather than losses.

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. This is because there could be overlapping tickers in certain asset classes of the portfolio strategies you elected. TLH does not harvest losses in any asset classes with overlap to help reduce the risk of wash sales and/or permanently disallowed losses.  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 Innovative Technology Portfolio Disclosure, the Value Tilt Portfolio Disclosure, the Goldman Sachs Smart Beta Disclosure, the Goldman Sachs Tax-Smart Bonds Portfolio Disclosure, the BlackRock Variable Bonds Portfolio Disclosure, the Crypto ETF Portfolio Disclosure, and the Custom Portfolio Disclosure. 

Clients invested in Advisor-designed custom portfolios through Betterment Advisor Solutions (“custom portfolio”) should consult their Advisors to understand the limitations of TLH with respect to any custom portfolio. Clients who hold mutual funds in a custom portfolio should understand that any security group with a mutual fund as its primary security will not be eligible for TLH. Clients invested in a custom portfolio should also be aware that Betterment’s TLH feature does not consider tickers designated as sell-only substitutes when evaluating shares of a security group to be sold in a tax loss harvest. This means that Betterment’s TLH feature does not harvest unrealized losses for sell-only substitutes, and that there may be fewer opportunities to harvest losses in a custom portfolio that contains a sell-only substitute relative to other portfolio strategies that Betterment supports. However, TLH will evaluate the same ticker designated as a sell-only substitute for harvests for other goals within the same legal account under the following circumstances: a client has elected a different portfolio strategy (i.e., not the custom portfolio for which the ticker is designated a sell-only substitute) and that ticker is designated as a primary or secondary ticker for that alternate portfolio strategy. See the Custom Portfolio Disclosure for more information.

Due to Betterment’s monthly cadence for billing fees for advisory services, through the liquidation of securities, TLH may be adversely affected for clients with particularly high stock allocations, third party portfolios, or flexible portfolios. As a result of assessing fees on a monthly cadence for a client 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.

2. Betterment's Personalized Estimated Tax Savings Tool

Betterment’s TLH Estimated Tax Savings Tool is found in your online account and is designed to quantify the tax-saving potential of Betterment’s Tax Loss Harvesting (TLH) feature. By leveraging both transactional data from Betterment accounts and your self reported demographic and financial profile information, the tool generates dynamic estimates of realized and potential tax savings. These calculations provide both current year and cumulative ("all-time") tax savings estimates.

Betterment’s estimated tax savings tool relies on your client-provided financial profile information: self-reported annual pre-tax income, state of residence, tax filing status (e.g. individual, married filing jointly), and number of dependents. This information is used to estimate your federal and state income tax rates, long-term capital gains (“LTCG”) rates, and applicable standard deductions. Betterment’s estimated tax savings methodology also incorporates the IRS' cap on ordinary income offsets for capital losses and also incorporates any available carryforward losses from your Betterment accounts. If your financial profile information is not accurate or up-to-date, the tool’s estimates will not be accurate. 

For current year estimated tax savings, Betterment calculates your current year estimated tax savings from TLH based on an offset ordering set by the IRS:

1. Short-term losses offset short-term gains;
2. Long-term losses offset long-term gains;
3. Remaining short-term losses offset long-term gains;
4. Remaining long-term losses offset short-term gains;
5. Remaining short-term losses offset ordinary income;
6. Remaining long-term losses offset ordinary income; and
7. Any further losses are carried forward. 

Using this ordering, the current year estimated tax savings tool calculates potential tax savings from a Short-Term Offset, a Long-Term Offset, and an Ordinary Income Offset, and sum those components together to generate your current year estimated tax savings amount. To learn more about this methodology, review the TLH whitepaper.

For all-time estimated tax savings, Betterment calculates your all-time estimated tax savings from TLH based on the sum of all-time long-term harvested losses multiplied by the client’s assumed long-term capital gains rate, plus all-time short-term harvested losses multiplied by the client’s assumed marginal ordinary income rate (which is the sum of the client’s assumed federal and state tax rates). The All-Time Estimated Tax Figure represents all your harvested losses through Betterment’s TLH feature to the present date, and rather than calculate offsets, Betterment assumes that you are able to fully offset their long-term harvested losses and short-term harvested losses with gains.

The estimated tax savings figures presented are estimates—not guarantees—and rely on the information you’ve provided to Betterment. Actual tax outcomes may vary based on your actual tax return and situation when filing. The tool evaluates only the activity within your Betterment accounts and does not take into account any investment activity from external accounts. For the current year calculation, the tool also assumes that you have sufficient ordinary income to fully benefit from capital loss offsets, and for the all-time calculation, the tool provides a tax-dollar estimate of all harvested losses, based on character (short- or long-term) and current tax rates.

Additionally, the estimated tax savings calculation simplifies the treatment of certain entities; for example, trusts, business accounts, or other specialized tax structures are not handled distinctly (i.e. the estimated tax savings tool treats trust and business accounts as an individual account). State-level tax estimates exclude city tax rates and municipal taxes, which may also affect your overall tax situation. The “all-time estimate” shown reflects an approximation of the total tax impact of harvested losses to date—including benefits that have not yet been realized or claimed.