Home / Business and Economy / Tax Trick: Munis Used to Slash Bills, Then Reinvested
Tax Trick: Munis Used to Slash Bills, Then Reinvested
22 Oct
Summary
- Investors are selling municipal bonds to realize tax losses.
- Record $5 billion flowed into muni ETFs in one week.
- Muni income is exempt from federal taxes, enhancing tax-loss benefits.
Investors are capitalizing on recent declines in municipal bonds by strategically selling their holdings to harvest tax losses. This popular strategy allows bondholders to reduce their tax bills, with the unique benefit of muni bond income being exempt from federal taxes. This contrasts with other asset classes where tax-loss harvesting often only defers tax payments.
Following this tax-loss harvesting, investors are reinvesting in the municipal bond market, particularly through exchange-traded funds (ETFs). For the week ending October 14, muni ETFs experienced unprecedented inflows of $5 billion, surpassing the previous week's record. Concurrently, open-ended muni mutual funds saw outflows totaling $3.4 billion.
This trend reflects a broader shift in the muni market, with investors increasingly favoring ETFs over traditional mutual funds. The market has seen significant trading volume, with recent October trading days exceeding 93% of full months between 2007 and 2021. Despite a challenging September, municipal bonds have begun to recover, offering attractive tax-equivalent yields and encouraging continued investor participation.
