Tax loss harvesting for US persons living in Switzerland

18 Jan. 2021

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Investing in ETFs

22 Dec. 2021

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Introducing a catch-22

A 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

• By using ETFs from Europe:

— Swiss / European tax efficiencies
— CHF exposure
— Liable for (high) US PFIC taxes

• 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)

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

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:

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

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

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

TLH happens when Benefit >= Cost + Threshold (2/2)

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.

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.

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.

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Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and Simplewealth AG charges and expenses.

Simplewealth AG is a Swiss-based advisory service, designed to assist clients in achieving discrete financial goals. We are not intended to provide comprehensive tax advice or financial planning with respect to every aspect of a client's financial situation and do not incorporate specific investments that clients hold elsewhere.

Past performance is not an indicator of future performance. Unless otherwise specified, all return figures shown above are for illustrative purposes only and are not actual customer or model returns. Actual returns will vary greatly and depend on personal and market conditions.

Investing implies your capital is at risk. The value of your account depends on market movements and you may get back less than you invest.