Riskalyze Trading allows you to optimize trades, efficiently control the amount of long and short-term capital gains incurred during rebalances, all while maintaining alignment with the account’s target allocations through Intelligent Tax Optimization (ITO). ITO uses the original holding’s cost basis information to calculate the potential proceeds that would result from selling each tax lot, and will then select the specific tax lots that create the lowest realized gain.
How it works
ITO defaults to allow ALL capital gains in a taxable account. For those situations where you’d like to optimize the tax approach, our tax optimization engine provides you with three tax management options for each account to: allow capital gains, avoid short-term capital gains, or avoid short and long-term capital gains.
Note: Once an account has been selected, a sidebar will appear with the generated trades as well as the “results After Trades” summary. This breaks down the number of positions the account will have after the trades are completed, the estimated cash that will remain in the account, and the estimated risk level of the resulting holdings.
Select the “Tax Management” Tab to view the ITO options.
Note: This chart highlights the total capital gains that will result from the trades for this single account, segmented into short term and long term. You can also find the Estimated Target Accuracy.
Intelligent Tax Optimization Options
Now it’s time to optimize for the tax positioning you and your clients have agreed upon. Choose the option that best fits the balance between maximizing the trade target allocations and reducing the capital gain exposure:
ALLOW CAPITAL GAINS
Riskalyze Trading will automatically default to “Allow Capital Gains”. This means that trades will generate to align the account as closely as possible with the target portfolio without any tax consideration for capital gains.
AVOID SHORT TERM CAPITAL GAINS
By selecting the “Avoid Short Term Capital Gains” option, Riskalyze trading will omit any trades that would result in a positive short term capital gain for positions dated less than one year from the current date.
AVOID SHORT AND LONG TERM CAPITAL GAINS
Choosing this option will optimize trades to ensure that no tax liability is incurred. This option may be unavailable if all, or a large proportion, of the account’s holdings, are trading above their cost basis. Because any sells would realize capital gains if the account does not already contain excess cash, no trades would be possible given this constraint.
Missing Cost Basis Information
There may be times when the original investment cost basis isn’t provided by the custodian. Accounts within the Trading Dashboard that are highlighted yellow and show “Missing Cost Basis Information” indicate that Riskalyze is not receiving the tax lots for those positions from the custodian. Riskalyze Trading will still allow you to trade these accounts without populating the Tax Management tab until the necessary position data such as purchase and sale, cost basis, and sale price are available within the data feed.
Estimated Trade Target Accuracy
The Estimated Target Accuracy is a measure of how close the proposed trades will bring the account to its target allocations given the tax constraints that are selected. When using the “Allow Capital Gains” option, our trade engine will automatically include any and all trades that seek to realign the account with its targeted allocations. Choosing to limit Short Term Gains and/or Long Term Gains will omit any trades that generate positive gains in these respective categories.
For a more technical look at how ITO functions, check out Intelligent Tax Optimization (ITO): Diving Deeper.
Pro Tip: Our Riskalyze Academy Trading learning path gives you all of the inside information you need to become a trading guru.
Still have questions about Intelligent Tax Optimization? Submit a request.