Advisors often take into consideration the impacts of harvesting capital gains when deciding whether or not to rebalance. This can be a challenging task to do manually, especially when trying to scale your practice with regular models based rebalances. That's why Trading does the calculation for you. With capital gains analysis, Trading gives you the necessary gain/loss information to make a one click fiduciary decision - helping you prevent clients from realizing unnecessary taxes.
Estimating Capital Gains
Capital gains estimates show up on taxable accounts when trades are pending in your trading dashboard.
Trading calculates estimated capital gains assuming the FIFO depletion method is used during trading. Cost basis is calculated using tax lot data provided by your custodian.* Below is a simplified example of how Trading calculates the estimated capital gains for each account:
Dianne Lipman has an account with a 100% allocation to VOO - a position she purchased when managing her self-directed taxable account at Etrade. Since then she has transferred the account under her new advisor's discretion. Now, her Advisor intends to rebalance the account into a Blackrock model portfolio but wants to maintain a 20% position in VOO. Currently, the account looks like this.
Lipman Individual Account # --5555
Tax lot #1 100 shares @ $500 on 01/01/2000
Cost basis = $50,000
Tax lot #2 50 shares @ $750 on 01/01/2010
Cost basis = $37,500
Since Dianne's last purchase the price of VOO has increased to $1000/share. Dianne's account balance is now $150,000, so a 20% allocation in VOO would require her to hold $30,000. In order to reach the target allocation, the advisor needs to sell $120,000 worth of VOO. This means Dianne will recognize capital gains on the liquidation of 120 shares. But Dianne has a total of 150 shares purchased at two different prices. So which lots should be used to estimate capital gains?
Assuming the FIFO (first in first out) method is used, Dianne will be selling the entirety of tax lot #1, and 40% of tax lot #2. Selling 100% of tax lot #1 will result in $50,000 of realized capital gains, and selling 40% of tax lot #2 will result in $5,000 of realized capital gains. The total estimated capital gains impact of this rebalance will be $55,000.
Obviously, the complexity of this calculation increases as we add more positions and tax lots to the account and at some point, this task becomes too large for a spreadsheet or yellow legal pad. Fortunately, Trading does all of the calculations automatically, leaving you the Advisor with a single decision. Are the potential realized gains (or losses in some cases) appropriate for my Client right now? Using one-click fiduciary, you can snooze or approve the account depending on the answer.