With the end of 2022 approaching, it seems that investors are preparing to lower their tax bills. In a bid to achieve that, investors have pulled $42 billion from the stocks in an attempt to lower their tax bill. This was revealed by the Bank of America, which tells us that it was a rather difficult year for the US stocks.
Overall, the equities outflow reached $41.9 billion, which is the largest amount ever pulled for the purpose of tax loss harvesting. We also have to consider that 2022 was a bruising year for the stock market.
With the process of tax loss harvesting, people usually sell their ETFs, stocks, and mutual funds without any profit (at a loss). This is then used to offset the capital gains.
According to experts, this technique can be used to offset income or any other expected future gains and is widely used by investors.
According to data from Bank of America, around $10 billion were removed from the bonds market. In addition, the US value funds witnessed an outflow of $172. billion, while passive equities saw outflows of $27.8 billion. Overall, this was a new record for each market!
In addition, the cash holdings were also reduced by the investors to the account of $59.5 billion. Once again, a cut like this is the largest since February 2022.
During the period between February - March, fund managers increased their cash levels in response to the heightened risks amid Russia's invasion of Ukraine and high inflation.
But this time, it has more to do with the tax season ahead as investors attempt to lower their applicable taxes. At the time of writing this, the Nasdaq index is already down by 30% while the S&P 500 is at 20% downside.
In addition, the borrowing costs have also surged with the policies from the Federal reserve. Overall, it was a difficult year for the tech sector and the US stocks as a whole.