In recent years, many people have suffered losses from investing in long-term US government bonds. Experts suggest that now is the time to sell these bonds. Not because interest rates may rise and thus reduce bond losses (although this is possible), but rather to realize a capital loss by the end of this year, which can be used to offset potential capital gains tax when filing taxes in April next year.
MarketWatch columnist Hubert pointed out that this strategy only applies to taxable accounts. If you hold US government bonds in such an account and fail to execute this strategy before the end of this year, you will have to pay more taxes next year.
Hubert gave an example: if in August 2019, when long-term US government bonds reached their peak, you invested $100,000 in SPDR Long-Term Treasury ETF (code: SPTL) and still hold it today, the net value of this investment is now around $64,000, resulting in a long-term capital loss of about $36,000. Assuming your marginal tax rate is 30% and you have at least an equal amount ($36,000) of capital gains available for offsetting purposes, selling your SPTL position can save up to $11,000 in taxes.
If you want to continue investing in US Treasuries and don’t want to sell them? In theory, that could be a problem because the Internal Revenue Service (IRS) has a wash sale rule that prevents you from using capital losses to offset capital gains within 30 days of selling. However, it is practical as long as you sell them and buy another different long bond ETF.
But when choosing an alternative long bond ETFs during the “wash sale” period within 30 days after selling your original one，it’s important not choose one recognized by IRS as “substantially identical” with the sold ETF. For example，if Vanguard Long-Term Bond Index ETF (code: VGLT) is chosen as a replacement for SPTL, it violates the “wash sale” rule because both of these ETFs are benchmarked against the Bloomberg US Long Treasury Bond Index.
There are other US long bond ETFs that track different benchmark indices and are more likely to comply with the rules. For example, iShares 20+ Year Treasury Bond ETF (code: TLT), which tracks the IDC 20+ Year US Treasury Bond Index. The performance of TLT is not exactly the same as SPTL but it’s similar. Since August 2019 when the market for long-term US government bonds reached its peak, SPTL has had an annualized loss rate of 10.1%, while VGLT has had an annualized loss rate of 10.9%.