Tax loss harvesting for US persons living in Switzerland

18 Jan. 2021
Author
Courtney Henry

Introducing a catch-22

Introducing a catch-22

Introducing a catch-22

catch-22 is a paradoxical situation from which an individual cannot escape because of contradictory rules or limitations
catch-22 is a paradoxical situation from which an individual cannot escape because of contradictory rules or limitations
Investing as US-person in Switzerland: catch-22
Investing as US-person in Switzerland: catch-22
Investing as US-person in Switzerland: catch-22
• By using ETFs from Europe:
• By using ETFs from Europe:
— Swiss / European tax efficiencies
— CHF exposure
— Liable for (high) US PFIC taxes
— Swiss / European tax efficiencies
— CHF exposure
— Liable for (high) US PFIC taxes
• By using ETFs issued in the US, mostly:
• By using ETFs issued in the US, mostly:
— Only USD, no products in CHF, EUR or GBP
— Difficult to report taxes in Switzerland (or
anywhere outside the US)
— Only USD, no products in CHF, EUR or GBP
— Difficult to report taxes in Switzerland (or
anywhere outside the US)

After review, Simplewealth should use US ETF for US clients and reduce their tax liability

After review, Simplewealth should use US ETF for US clients and reduce their tax liability
After review, Simplewealth should use US ETF for US clients and reduce their tax liability
Tax-loss harvesting (TLH) is a way to generate tax savings for US taxpayers
  • Tax loss harvesting is a way to generate tax savings in addition to investment returns
  • It works by identifying investment losses and selling those securities to recognize the loss
  • These losses can be used to offset other gains and reduce or postpone income taxes
  • You can also move your tax losses to future years via a “tax-loss carryforward”
Note: we encourage you to seek advice from a US and Swiss tax professional to check if Tax Loss Harvesting is right for you
Tax-loss harvesting (TLH) is a way to generate tax savings for US taxpayers
  • Tax loss harvesting is a way to generate tax savings in addition to investment returns
  • It works by identifying investment losses and selling those securities to recognize the loss
  • These losses can be used to offset other gains and reduce or postpone income taxes
  • You can also move your tax losses to future years via a “tax-loss carryforward”
Note: we encourage you to seek advice from a US and Swiss tax professional to check if Tax Loss Harvesting is right for you
Tax-loss harvesting (TLH) is a way to generate tax savings for US taxpayers
  • Tax loss harvesting is a way to generate tax savings in addition to investment returns
  •  It works by identifying investment losses and selling those securities to recognize the loss
  • These losses can be used to offset other gains and reduce or postpone income taxes
  • You can also move your tax losses to future years via a “tax-loss carryforward”

Note: we encourage you to seek advice from a US and Swiss tax professional to check if Tax Loss Harvesting is right for you

A simple tax loss harvesting example

A simple tax loss harvesting example
A simple tax loss harvesting example
The total potential tax benefit is the loss of $45 per share multiplied by the number of shares you own and then multiplied by your tax rate.
Assuming a federal tax rate of 24% and no state tax rate:
The total potential tax benefit is the loss of $45 per share multiplied by the number of shares you own and then multiplied by your tax rate.
Assuming a federal tax rate of 24% and no state tax rate:

This benefit is typically referred as Tax Alpha and expressed as an additional % return of your investment portfolio (since it effectively adds to your investment return). In this simple case, you generated a tax alpha of 17% on the original $6’500 investment.

We encourage you to seek advice from a US and Swiss tax professional to check if Tax Loss Harvesting is right for you.


After harvesting, you can maintain the risk and return of your portfolio by replacing your harvested ETF A with a similar but not identical ETF B.


Thirty days later, you can sell ETF B and return to ETF A.


These steps are required to claim a tax benefit while avoiding the IRS wash-sale rule (see appendix)

This benefit is typically referred as Tax Alpha and expressed as an additional % return of your investment portfolio (since it effectively adds to your investment return). In this simple case, you generated a tax alpha of 17% on the original $6’500 investment.

We encourage you to seek advice from a US and Swiss tax professional to check if Tax Loss Harvesting is right for you.


After harvesting, you can maintain the risk and return of your portfolio by replacing your harvested ETF A with a similar but not identical ETF B.


Thirty days later, you can sell ETF B and return to ETF A.


These steps are required to claim a tax benefit while avoiding the IRS wash-sale rule (see appendix)

The ETF A and B: similar but not identical

The ETF A and B: similar but not identical
The ETF A and B: similar but not identical
How can I get this?
Open your diversified and tax-optimized investment account now on www.simplewealth.ch
How can I get this?

Open your diversified and tax-optimized investment account now on www.simplewealth.ch

Appendix

Appendix

Appendix
TLH happens when Benefit >= Cost + Threshold (1/2)
TLH happens when Benefit >= Cost + Threshold (1/2)
TLH happens when Benefit >= Cost + Threshold (1/2)
Benefit is calculated by multiplying the potential realized capital loss incurred from selling an ETF times either the short-term or long-term capital gains tax rate, depending on the ETF’s holding period. (Potential Capital loss x tax rate) e.g, Position (USD 10’000) x loss (3%) x short term tax rate 20% = USD 60
Cost captures the trading cost of selling the primary ETF and buying the secondary ETF. That’s the estimate of the bid-ask spread of 0.1% + stamp duty of 0.15% x 2 = 0.4% rounded to 0.5% of the position e.g., Position USD 4850 x 0.5% = USD 24.25
Benefit is calculated by multiplying the potential realized capital loss incurred from selling an ETF times either the short-term or long-term capital gains tax rate, depending on the ETF’s holding period. (Potential Capital loss x tax rate) e.g, Position (USD 10’000) x loss (3%) x short term tax rate 20% = USD 60

Cost captures the trading cost of selling the primary ETF and buying the secondary ETF. That’s the estimate of the bid-ask spread of 0.1% + stamp duty of 0.15% x 2 = 0.4% rounded to 0.5% of the position e.g., Position USD 4850 x 0.5% = USD 24.25

TLH happens when Benefit >= Cost + Threshold (2/2)
TLH happens when Benefit >= Cost + Threshold (2/2)
TLH happens when Benefit >= Cost + Threshold (1/2)
Threshold is an estimate of the expected future harvesting benefitThreshold is modeled by assessing the likelihood that a better harvesting opportunity is available by waiting longer to perform the tax-loss harvesting trade (and thus potentially capturing more of the ETF’s decline). It’s directly linked to the volatility of the asset.
We execute two trades when we believe the Benefit exceeds the Cost + Threshold:
• We sell the specific ETF lot to recognize a loss
• We purchase the same dollar amount of a similar, but not substantially identical, ETF to maintain the desired asset class exposure.
Threshold is an estimate of the expected future harvesting benefitThreshold is modeled by assessing the likelihood that a better harvesting opportunity is available by waiting longer to perform the tax-loss harvesting trade (and thus potentially capturing more of the ETF’s decline). It’s directly linked to the volatility of the asset.
We execute two trades when we believe the Benefit exceeds the Cost + Threshold:
• We sell the specific ETF lot to recognize a loss

• We purchase the same dollar amount of a similar, but not substantially identical, ETF to maintain the desired asset class exposure.

Note: about wash sales
Note: about wash sales
Note: about wash sales
One complexity in executing daily tax-loss harvesting strategy is the management of wash sales.
Normally, you recognize a loss when you sell a security for less than its cost basis.
However, if you buy the same or substantially identical security within 30 days of the sale, the wash sale rule applies and you are not allowed to claim the tax benefit.
Example: You own ETF A (say 1000 units @ 10$). It drops 10%.
Hence we sell ETF A, claim, 1000$ of tax loss and buy 9000$ of ETF B (similar but not identical).
Within 30 days even if ETF B drops again, we cannot sell ETF B and buy ETF A. Hence the value of having a threshold according to volatility.
One complexity in executing daily tax-loss harvesting strategy is the management of wash sales.
Normally, you recognize a loss when you sell a security for less than its cost basis.
However, if you buy the same or substantially identical security within 30 days of the sale, the wash sale rule applies and you are not allowed to claim the tax benefit.
Example: You own ETF A (say 1000 units @ 10$). It drops 10%.
Hence we sell ETF A, claim, 1000$ of tax loss and buy 9000$ of ETF B (similar but not identical).

Within 30 days even if ETF B drops again, we cannot sell ETF B and buy ETF A. Hence the value of having a threshold according to volatility.

Note: neutral impact on Swiss taxes
Note: neutral impact on Swiss taxes
Note: neutral impact on Swiss taxes
No capital gains tax in Switzerland (and no tax loss harvesting possibility)
We need to select US ETF with reporting to Swiss tax authorities, to simplify yearly tax filing and reporting.
No capital gains tax in Switzerland (and no tax loss harvesting possibility)
We need to select US ETF with reporting to Swiss tax authorities, to simplify yearly tax filing and reporting.
No capital gains tax in Switzerland (and no tax loss harvesting possibility)

We need to select US ETF with reporting to Swiss tax authorities, to simplify yearly tax filing and reporting.

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