SoFi

Booking a hotel can feel like spinning the roulette wheel — you’re never quite sure where you’ll land pricewise. You can find different hotel rates listed from one travel site to another, as well as on individual hotel websites. The result: Confused and frustrated travelers.

Understanding how hotel pricing works and why rates range so widely is a good first step in demystifying the hotel booking process. Here we’ll explain why hotels do what they do, then offer advice on how you can use that knowledge to find the best rate for your next out-of-town stay.

What Factors Influence Hotel Rates?

Many factors determine the price you pay for your hotel stay, from the destination you’re seeking to the time of year you’re traveling. Other influences are less predictable. Let’s take a closer look.

Location

It’s no secret that sought-after hotels in large cities or popular resorts will cost quite a bit more than a modest motel on a country road. But did you know pricing also varies widely within a location? Hotels near city attractions such as sports arenas, convention centers, downtown, or revitalized neighborhoods will likely charge significantly more than the same type of property located on the outskirts of town or in the suburbs.

Star Ratings

A variety of different groups — such as guidebook publishers, consumer associations and travel websites — award hotels between one and five stars. The more stars awarded, the more the hotel will charge.

But star ratings are not standardized. The same hotel may have three different ratings, depending on where you’re looking. And each star-giving organization has its own methodology (although you can usually find an explanation on the website). The bottom line: Rates among hotels in the same location with the same star rating can still vary significantly.

In general terms, here’s what star ratings usually mean:

•   1 star. Often independently owned, these hotels/motels provide the bare minimum.

•   2 stars. Economy chains, such as Econo Lodge or Days Inn, offer the basics plus a few “extras” — like a television.

•   3 stars. Usually big chains, such as Marriott and DoubleTree, have stylish, comfortable rooms with true extras, such as a fitness room and restaurant.

•   4 stars. These are large, fully staffed, upscale hotels with lots of extras.

•   5 stars. Luxury hotels indulge customers with all imaginable amenities.

Keep in mind that one or two stars does not necessarily signify a lack of cleanliness or safety. They may be perfectly fine, just no frills. Best to check online reviews to make sure.

Recommended: How Families Can Afford to Travel

Room Type

Whether you’ve chosen a no-frills two-star motel or a glamorous five-star resort, you’ll pay more for certain rooms within the same building. The view, proximity to a noisy elevator, square footage, and the number and size of beds are taken into account when pricing a specific room. Sometimes room upgrades are available using your credit card rewards.

Amenities and Additional Services

Special touches, like turn-down service and super fluffy towels, can add to your enjoyment during, but they’ll also add to the price. Hotels factor high-end bedding, luxurious towels, upscale bath products, complimentary dry cleaning and 24-hour room service into the price of each room.

Recommended: Traveling with Pets

Peak Season and Holidays

Hotels in prime destinations book up fast during busy travel seasons such as holidays, spring break, and summer vacation. Sometimes peak season really does follow the seasons, such as winter months in Florida and summer months in New England. Because the volume of travelers increases during peak season, hotels know they can charge higher prices and still book all or almost all of their rooms.

Peak times can even be determined by the day of the week. In most locations that cater to non-business travelers, you’ll likely pay more to stay on a weekend night than a weekday, no matter what time of the year you are traveling.

Supply and Demand

This may be the most significant factor in determining hotel rates. Hotels profit when they achieve maximum occupancy for as many nights as possible. As long as demand for rooms is strong, hotels know they can price rooms at higher rates and still get customers. Holidays, major events, and school breaks are all times when hotels can potentially achieve full or near full occupancy.

That said, hotels can’t afford to let rooms go empty, so when demand is slow, operators will drop rates, sometimes even at the last minute, hoping to lure available customers from the competition.

Tips to Getting the Best Rate on Your Hotel

Now that you’ve got the inside story on hotel pricing and availability, let’s see how you can use that information to get the best rates and stay within your travel budget.

1. Be Flexible

Off peak doesn’t have to mean the dead of winter or the middle of hurricane season. If you have the flexibility to move your vacation dates just a week or two, you can often save a bundle on hotel rates. Traveling the week after Easter, for instance, or just after Labor Day can make a world of difference.

2. Book in Advance for Peak Season Travel

Sometimes peak season travel can’t be avoided. If you must travel for a holiday, big event, or during a popular vacation time, book as far ahead as possible so you’ll be first in line. As rooms book up, pricing for remaining rooms can increase even more — a situation you want to avoid.

Recommended: Where to Find Book Now Pay Later Vacations

3. Off Peak, Consider Waiting Until the Last Minute

During less busy travel times, hotels have been known to drop rates at the last minute in an effort to fill rooms. Or they may offload empty rooms to an online travel agent. (More on these sites below.) If you use the wait-and-see approach, you may need to search among several locations, so flexibility is key.

4. Off the Beaten Path

As mentioned above, hotels in the most central, desirable locations charge the most. Consider a property that may be just as nice but a little bit out of the way — say a bus ride to downtown or a relaxing walk to the beach. If you’re willing to be a bit of an explorer, you can save on hotel rates and perhaps discover a charming area you wouldn’t have otherwise.

5. Compare Travel Websites

Online travel agents and travel websites like Priceline, Expedia, Kayak, and Orbitz offer hotel bookings at major chains and independent inns and resorts. Some of these sites specialize in last-minute bookings.

Often these sites will feature rates below those offered on the hotel website. But rates vary among the different sites, so you’ll want to do a thorough search to find the best deal.

And always check back with the hotel, calling the location you are interested in to see if you can negotiate a lower price for the same room than what you’re finding online. In some cases, hotels may offer you the same rate, but will upgrade your room or throw in other extras.

Last-minute bookings at some online travel agents such as Hotel Tonight and Hotwire are opaque — a travel industry term that means you agree to book without knowing the name of the hotel until you pay for it. Instead, you’ll see the location, star rating, and price to help you make a decision.

6. Consider Nonrefundable Reservations

Many hotels and travel websites offer cheaper rates for nonrefundable bookings. The savings can be significant, but the risk of losing your money is substantial too.

There are ways around this. If you have a cancel-for-any-reason travel insurance policy for your trip, your hotel costs will be partially refunded.

In addition, check if your credit card offers travel insurance that will cover cancellations for any reason.

7. Track Your Refundable Hotel Reservations

There is also a way to save money on refundable hotel rates that allow you to cancel at any time. Go ahead and book the best deal you can find, then periodically check back to see if the rate has fallen. If it has, rebook at the new lower rate, then cancel your original reservation.

If you don’t have time to track the prices yourself, use a website or app like Rebookey that will monitor your reservation for you and notify you if the rate drops.

8. Use Your Rewards

If you belong to any hotel chain loyalty programs, always check for member discounts at properties in or near the destination you are headed. You may find a comparable or better deal than you can find elsewhere. And you’ll rack up more points.

Most airline credit cards and travel credit cards have affiliations with major hotel chains. You may be able to use your reward points to pay for your hotel room. Or if you have a cash-back credit card, you may have enough in the “bank” to cover your hotel costs.

Recommended: Choosing Between Cash Back and Travel Rewards

9. Always Ask for Specific Discounts

Many hotel chains offer discounts for members of AARP, AAA, and other organizations. Be sure to ask when you make your reservation. If you book with an online service that doesn’t ask for this information, check with the hotel receptionist when you register.

The Takeaway

Making sense of the puzzling way hotels set prices can help travelers become better shoppers. When you know how rates work, you can use several tools — last-minute bookings, price-tracking sites, discount memberships, and more — to save on your hotel bill. In addition, the more flexible you can be about when you travel and what hotel you stay at, the easier it will be to find the best deals.

Whether you want to travel more or get a better ROI for your travel dollar, SoFi can help. SoFi Travel is a new service exclusively for SoFi members that lets you budget, plan, and book your next trip in a convenient one-stop shop. SoFi takes the guessing game out of how much you can afford for that honeymoon, family vacation, or quick getaway — and we help you save too.

FAQ

Why does the price of hotels vary so much?

Many factors go into hotel pricing, including location, star ratings, type of room, amenities, peak or off-season, and supply and demand. Hotel rooms may be priced differently if they are sold through online travel agents and other travel websites versus purchasing from the hotel directly.

What is considered off season?

Traditionally, off-season travel has been defined by the seasons. For example, peak season in warmer climates like Florida, Arizona, or island resorts hits in the cold winter months — and hotel prices surge. But off-season can also mean big savings just a few days or weeks away from peak travel times.

What’s the best way to get a last-minute hotel discount?

Several travel websites specialize in last-minute bookings. In an effort to avoid rooms going empty, hotels will sell through these sites. You can get a good deal this way, but in most cases, you’ll pay for the room without knowing the name of the hotel — only the price, location, and star rating.

Can I negotiate hotel rates?

Sometimes. If you find a better rate on a travel website than the hotel is advertising on its own site, it can make sense to call the hotel directly and ask if they will beat the travel site price. The hotel may agree. Or it may match the discounted price but offer extras such as meal vouchers or a room upgrade.

Photo credit: iStock/structuresxx

¹See Rewards Details at SoFi.com/card/rewards.


**Terms, and conditions apply: This SoFi member benefit is provided by Expedia, not by SoFi or its affiliates. SoFi may be compensated by the benefit provider. Offers are subject to change and may have restrictions, please review the benefit provider's terms: Travel Services Terms & Conditions.
The SoFi Travel Portal is operated by Expedia. To learn more about Expedia, click https://www.expediagroup.com/home/default.aspx.

When you use your SoFi Credit Card to make a purchase on the SoFi Travel Portal, you will earn a number of SoFi Member Rewards points equal to 3% of the total amount you spend on the SoFi Travel Portal. Members can save up to 10% or more on eligible bookings.

In light of recent events, some bank customers may wonder how safe a checking account is in terms of stashing their cash.

Banks are far better for protecting your hard-earned cash than you keeping a wad of bills hidden somewhere in your home — mainly because the money you deposit in a bank is insured up to $250,000 or possibly more¹.

But there’s more to the story. So read on, and we’ll tell you in detail how banks make sure your money is well defended — and what you can do to help keep those dollars safe.

Is My Money Safer at a Bank?

It’s only natural to wonder where your money is safest, and keeping your cash on deposit at a bank is one of the safest things you can do. For one thing, carrying cash with you — or, worse, hiding it in your house — leaves you vulnerable to theft or loss (or some other unforeseen event).

In addition, banks are highly regulated and, as mentioned, deposits are insured. And as many people now know, the government is fully invested in protecting the cash of its citizens.

Why Your Money Is Safer in the Bank

Here are some of the protections your checking account may have:

•   FDIC insurance

•   NCUA insurance

•   Capital requirements

•   Protection from fires, floods, and thefts

Read on for a brief description of these protections.

FDIC Insurance

The Federal Deposit Insurance Corporation (FDIC) protects people who deposit money into FDIC-insured financial institutions against loss. This kind of insurance is backed by the federal government and depositors are automatically insured, generally up to $250,000 per depositor, per FDIC-insured institution, per ownership category. (Some banks participate in programs that extend the FDIC insurance to cover millions.) If your bank were to go out of business, you’re covered up to the cap.

NCUA Insurance

Maybe you’re the kind of person who prefers to keep your cash at a credit union. Don’t worry; it’s still safe. Congress created the National Credit Union Administration (NCUA) in 1970 to insure deposits of up to $250,000 at federally insured credit unions. The $250,000 is for each member, per insured credit union, per ownership category. Basically, NCUA is an agency that provides coverage for credit union members that’s comparable to what FDIC does for bank customers.

Capital Requirements

Banks and other financial institutions that accept deposits must have enough liquid assets to cover their expenses while still being able to provide cash when depositors request withdrawals. Formulas to calculate capital requirements can be complicated, but know that they are in place and are protecting you.

A financial institution is required to have a risk-to-asset ratio of at least 4% to safeguard people who deposit funds into their institution.

Protections From Fires, Floods, and Thefts

Banks purchase banker blanket bonds, which protect the institution in case of fire, flood, robbery, embezzlement, earthquakes, and other causes of lost funds. As a result, even if the bank loses money, customers won’t lose their funds.

Advantages of Keeping Money in a Checking Account

Now, let’s pull back and take a big-picture look at why a checking account is such a sweet spot for protecting your money. Some of the pluses:

•   Your money is covered from loss when deposited in an FDIC-insured bank or an NCUA-insured credit union.

•   If your funds exceed the amount of these significant coverages ($250,000), then you can simply open accounts at an institution that offers an insurance program with a higher amount. Or you might open additional accounts at other insured banks and be covered through those institutions.

•   Interest-bearing checking accounts (though not all checking accounts do pay interest) allow you to earn money simply by keeping it in the account.

•   You can easily use your deposited funds by writing a check, withdrawing money from the bank or by an ATM, or transferring it.

•   Checking accounts that come with debit cards make it simple to make purchases through a card reader in person or by entering data online. (Note: There are cons of using a debit card online, like less fraud and purchase protection.)

•   Mobile banking makes it easy to conduct financial transactions wherever you go. You may be wondering, Is mobile banking safe? The answer is yes, most of the time, but you do need to take some precautions to avoid potential hacking activity (more on that below).

•   You can have your paycheck automatically/directly deposited into your checking account. This eliminates a paper check that could get lost or stolen; plus, you don’t have to physically deposit it yourself on payday.

•   A checking account can provide a record of what you spent — and when and where — which is helpful with budgeting, at tax time, and more.

•   Some banks allow you to get paid up to two days early — meaning that your direct deposit is available 48 hours before it’s actually deposited.

Your Role in Protecting Your Money in the Bank

You’ve learned about how banks safeguard your deposits…but what about your role in protecting your money? Yes, even when your dinero is locked up tight at a bank, your actions can impact its security. Consider the following points:

•   If you have any reason to believe that fraudulent activity is occurring or has occurred with your checking account, contact your bank immediately as well as local law enforcement.

•   Create a unique password for your checking account; consider storing it in a secure password management system. Then regularly change your password.

•   Regularly check your balance and balance your statements. This way, you can spot suspicious-looking activity early and address any discrepancies. Identity theft is not unusual and a proactive approach is the best way to protect yourself.

•   Be especially careful when using public Wi-Fi at libraries, coffee shops, and the like. While they’re convenient for information gathering, when you’re conducting financial transactions on them, the open connection makes it easier for hackers to do bad things.

•   Keep your own computer up to date, installing appropriate software updates, malware blockers, and so forth.

•   Sign up for fraud alerts with your bank. Receiving real-time transaction info through texts, emails, or mobile apps allows you to quickly respond to any attempts at fraud.

•   Also, don’t share your banking information with anyone by phone or email. For example, if someone claims to be a representative from your financial institute, hang up. Then use the contact information you have for your bank and share what happened.

The Takeaway

So, how safe are checking accounts? At insured institutions, depositors enjoy deep levels of protection. Besides being safe, there are numerous advantages to having a checking account. Definitely a win-win versus hiding your bucks somewhere at home. But depositing your funds is just part of the bargain: Then you have to do your share and keep vigilant and make sure that fraudsters don’t get their fingers on your dough.

If you’re looking for a bank that protects your money with 24/7 account monitoring, apply for an online bank account with SoFi. SoFi recently announced that deposits may be insured up to $2 million through participation in the SoFi Insured Deposit Program. But here’s what else: If you sign up for direct deposit with us, you’ll earn a competitive APY. Plus, you’ll pay no account fees, and you’ll be able to access your paycheck up to two days early.

FAQ

Is your money safe in a checking account?

Yes, your money is safe in a checking account. Federally insured banks and credit unions automatically protect depositors like you for up to $250,000 per person, per insured institution, per ownership category (or possibly more). These financial institutions are even covered in case of fire, flood, and earthquakes, as well as when crimes, such as robbery and embezzlement, occur.

What are the risks of a checking account?

Checking accounts come with plenty of benefits and, at federally insured financial institutions, with solid protection against risk. That said, there are a couple of potential disadvantages to checking accounts. For example, not all of them pay interest (although some do). Some come with monthly fees (which can get pricey). And some financial institutions will require a minimum balance in your account.

There’s also some risk of criminal activity: If you ever suspect that someone has hacked into or otherwise fraudulently used your checking account, contact your bank and local law enforcement.

Can someone steal your checking account?

Physical checks and debit cards can be stolen, and your account could be hacked. So keep all personal data in a secure place and, if any items are lost, contact your financial institution immediately. If you believe your checks or debit card to be stolen, also inform your local law enforcement.

Photo credit: iStock/akinbostanci

¹SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per depositor per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by the SoFi Insured Deposit Program. Deposits may be insured up to $3M through participation in the program. See full terms at SoFi.com/banking/fdic/sidpterms. See list of participating banks at SoFi.com/banking/fdic/participatingbanks.

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 11/12/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOBK0423006U

Automated tax-loss harvesting can be a tool for tax-efficient investing because it involves using an algorithm to sell securities at a loss so as to offset capital gains and potentially lower an investor’s tax bill.

Standard tax-loss harvesting uses the same principle, but the process is complicated and an advisor might only harvest losses once or twice a year versus automated tax-loss harvesting which can be done more frequently.

That said, automated tax-loss harvesting — which is sometimes a feature of robo-advisor accounts — may give investors only limited (or possibly no) tax benefits. Here’s a breakdown of whether an automated tax-loss strategy makes sense.

Tax-Loss Harvesting: The Basics

First, a quick recap of how standard tax-loss harvesting works. Tax-loss harvesting is a way of selling securities at a loss, and then “harvesting” that loss to offset capital gains or other taxable income, thereby reducing federal tax owed.

The reason to consider this strategy is that capital gains are taxed at two different federal tax rates: long-term (when you’ve held an asset for a year or more) and short-term (when you’ve held an asset for under a year).

•   Long-term capital gains are taxed at 0%, 15%, or 20%, depending on the investor’s tax bracket.

•   Short-term capital gains are taxed at a typically higher rate based on the investor’s ordinary income tax rate.

The one-year mark is crucial, because the IRS taxes short-term investments at the higher marginal income tax rate of the investor. For high-income earners that can be 37% plus a 3.8% net investment income tax (NIIT). That means the taxes on those quick gains can be as much as 40.8% — and that’s before state and local taxes are factored in.

Example of Basic Tax-Loss Harvesting

For example, consider an investor in the highest tax bracket who sells security ABC after a year, and realizes a long-term capital gain of $10,000. They would owe 20%, or $2,000.

But if the investor sells XYZ security and harvests a loss of $3,000, that can be applied to the gain from security ABC. So their net capital gain will be $7,000 ($10,000 – $3,000). This means that they would owe $1,400 in capital gains tax.

The differences can be even greater when investors can harvest short-term losses to offset short-term gains, because these are typically taxed at a higher rate. In this case, using the losses to offset the gains can make a big difference in terms of taxes owed.

According to IRS rules, short-term or long-term losses must be used first to offset gains of the same type, unless the losses exceed the gains from the same type. When losses exceed gains, up to $3,000 per year can be used to offset ordinary income or carried over to the following year.

What Is Automated Tax-Loss Harvesting?

Until the advent of robo-advisor services some 15 years ago, tax-loss harvesting was typically carried out by qualified financial advisors or tax professionals in taxable accounts. But as robo-advisors and their automated portfolios became more widely accepted, many of these services began to offer automated tax-loss harvesting as well, though the strategy was executed by a computer program.

Just as the algorithm that underlies an automated portfolio can perform certain basic functions like asset allocation and portfolio rebalancing, some automated programs can execute a tax-loss harvesting strategy as well. SoFi’s automated platform does not offer automated tax-loss harvesting, but others may, for example.

So whereas tax-loss harvesting once made sense only for higher-net-worth investors owing to the complexity of the task, automation has enabled some retail investors to reap the benefits of tax-loss harvesting as well. The idea has been that automated tax-loss harvesting can be conducted more often and with less room for error, thanks to the precision of the underlying algorithm — which can also take into account the effects of the wash-sale rule.

The Wash-Sale Rule

It’s important that investors understand the “wash-sale rule” as it applies to tax-loss harvesting.

What Is the Wash-Sale Rule?

The wash-sale rule prevents investors from selling a security at a loss and buying back the same security, or one that is “substantially identical”, within 30 days. If you sell a security in order to harvest a loss and then replace it with the same or a substantially similar security, the IRS will disallow the loss — and you won’t reap the desired tax benefit.

In the example above, the investor who sells security XYZ in order to apply the loss to the gain from selling security ABC may then want to replace security XYZ because it gives them exposure to a certain market sector. While the investor can’t turn around and buy XYZ again until 30 days have passed, they could buy a similar, but not substantially identical security, to maintain that exposure.

That said, it can be tricky to follow this guidance because the IRS hasn’t established a precise definition of what a “substantially identical security” is. This is another reason why automated tax-loss harvesting may be more efficient: It may be simpler for a computer algorithm to make these choices based on preset parameters.

How ETFs Help With the Wash-Sale Rule

This is how the proliferation of exchange-traded funds (ETFs) has benefited the strategy of tax-loss harvesting. Exchange-traded funds, or ETFs, are baskets of securities that typically track an index of stocks, bonds, commodities or other assets, similar to a mutual fund. Unlike mutual funds, though, ETFs trade on exchanges like stocks.

In some ways, ETFs may make tax-loss harvesting a little easier. For instance, if an investor harvests a loss from an emerging-market stocks ETF, he or she can soon after buy a “similar” but non-identical emerging-market stocks ETF because the fund may have slightly different constituents.

Because most robo-advisors generate automated portfolios comprised of low-cost ETFs, this can also support the process of automated tax-loss harvesting.

Other Important Tax Rules to Know

Tax losses don’t expire. So an investor can apply a portion of losses to offset profits or income in one year and then “save” the remaining losses to offset in another tax year. Investors tend to practice tax-loss harvesting at the end of a calendar year, but it can really be done all year.

As noted above, another potential perk from tax-loss harvesting is that if the losses from an investment exceed any taxable profits from trades, the losses can actually be used to offset up to $3,000 of ordinary income per year.

How Much Does Automated Tax-Loss Harvesting Save?

It’s hard to say whether automated tax-loss harvesting definitively and consistently delivers a reduced tax bill to investors. A myriad of variables — such as the fluctuating nature of both federal tax rates and market price moves — make it difficult to calculate precise figures.

The Upside of Automated Tax-Loss Harvesting

One study of standard (not automated) tax-loss harvesting that was published by the CFA Institute in 2020 found that from 1926 to 2018, a simulated tax-loss harvesting strategy delivered an average annual outperformance of 1.08% versus a passive buy-and-hold portfolio.

Taking into account transaction costs and the wash-sale rule, the outperformance or “alpha” fell to 0.95%.

The study found the strategy did better when the stock market was volatile, such as between 1926 and 1949, a period which includes the Great Depression. The average outperformance was 2.13% a year during that period, as investors found more opportunities to harvest losses. Meanwhile, between 1949 and 1972 — a quieter period in the market as the U.S. underwent economic expansion after World War II — tax-loss harvesting only delivered an alpha of 0.51%.

The Downside of Automated Tax-Loss Harvesting

While the research cited above identifies some benefits of tax-loss harvesting, like many investment studies it’s based on historical data and simulations of a portfolio, not real-world investments.

Another fact to bear in mind: This study does not factor in the impact of automated tax-loss harvesting, which is typically conducted more frequently — and may not deliver a tax benefit.

Indeed, in 2018 the Securities and Exchange Commission (SEC) charged a robo-advisor for making misleading claims about the benefits of automated tax-loss harvesting in terms of higher portfolio returns. Investors should know that there could be no or little tax savings, or even a bigger tax bill, depending on how different securities perform after they’re sold (or bought back).

For instance, if the underlying algorithm that automates trades in a robo portfolio harvests a loss from one ETF (to offset the gains from a sale of another ETF), it might then purchase a replacement ETF that’s not substantially identical, per the wash-sale rule.

If the second ETF is sold later, the gains realized from this second sale could be so high that they cancel out or be greater than the tax benefits from selling the first fund to harvest the loss.

In that case, the investor could end up paying more taxes down the road — effectively deferring, not eliminating, the tax burden.

Continuously trading assets in automated tax-loss harvesting also means an investor may incur additional costs, such as more transaction fees.

Pros of Automated Tax-Loss Harvesting

1.    Standard tax-loss harvesting is complex and time-consuming, but the benefits are well established. Therefore using automated tax-loss harvesting may be an efficient way to reap the benefits of this strategy because it can be done more automatically and consistently.

2.    To realize the benefits of tax-loss harvesting investors must obey the IRS wash-sale rule, which imposes restrictions that can be tricky to follow. In this way, an automated strategy may limit the potential for human error and may increase the tax benefits for investors.

Cons of Automated Tax-Loss Harvesting

1.    Because an algorithm performs tax-loss harvesting on an automated cadence, investors cannot choose which investments to sell and when and therefore have less control.

2.    An automated tax-loss program may not be able to anticipate a security’s future gains that could reduce or eliminate the tax benefit of harvested losses.

3.    Automated tax-loss harvesting could increase the amount an investor pays in transaction fees, which can lower portfolio returns.

The Takeaway

Automated tax-loss harvesting is a feature primarily offered by robo-advisors, which use a computer algorithm to automatically sell securities at a loss in order to potentially reduce the tax impact of capital gains realized from the sale of other securities.

While this practice can offer tax benefits in some cases, and academic studies have used portfolio simulations to gauge the potential for outperformance, it’s unclear whether automated tax-loss harvesting offers the same benefits. Because the strategy is carried out by an underlying algorithm, a computer program may not be capable of making more nuanced choices about which assets to sell and when.

Investors could potentially end up still owing capital gains taxes or paying more in transaction fees and brokerage fees.