The Investment Scientist

Another Opportunity From Fallen Bond Prices

Posted on: May 31, 2022

About a month ago, I wrote about the silver lining of fallen bond prices. The message I tried to get across was that the lower prices are not a bad thing: 1) You will still get your principal back; 2) You will earn higher interest income. Today I would like to tell you about another money-making opportunity presented by fallen bond prices – tax loss harvest!

This technique is usually used for stocks, but you can use it for bonds as well.

Let’s say that at the end of last year, you had $200k invested in various bond funds. Since then, bond prices have fallen about 10%. Your bond funds will show a $20k loss on paper. Now you can sell these funds to realize the loss and use the proceeds to buy other bond funds so that you have the same exposure. 

Why Do This?
Well, when you file your 2022 tax return next year, you can claim this $20k as an investment loss. Depending on whether you use it to offset your income, short-term gains or long-term gains, the value of this “loss” is worth between $4k to $10k in tax savings.

Pay Attention to this Caveat!
You must be careful to make sure the bond funds you buy are not too similar to the bond funds you sell. Otherwise, you will trigger the wash sale rule and forfeit the tax benefits.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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