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Transitioning an account to include US Direct Indexing or Smart Beta

When you add US Direct Indexing to your Automated Index Investing Account, we don't immediately sell VTI/ITOT in order to buy the new individual stocks. Instead, we first determine the expected tax consequences of these sales in your account.  We also evaluate the tax consequences of transitioning your account to Smart Beta if your account balance reaches $500,000.

Generally, we only sell one of the US broad market ETFs to upgrade to US Direct Indexing or Smart Beta if the transaction would result in your account maintaining a net realized loss of at least $3,000 for the year. For accounts transitioning to Smart Beta, we may reserve additional losses beyond the first $3,000 to offset potential future capital gains that may be generated through our investment strategy.

For example, if you own the US stock ETF, VTI, and it is trading at a gain, we typically only sell it to upgrade to US Direct Indexing if you have harvested more than $3,000 of tax-losses in the current year. We also purchase individual stocks as you make new deposits, as dividends are paid into your account, or if we have proceeds from tax loss harvesting transactions. This means that even if you add US Direct Indexing, your account may hold some shares of VTI indefinitely depending on market conditions. This same treatment applies if you are currently trading in US Direct Indexing and deposit funds to upgrade to Smart Beta.

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This content is for informational purposes only and is not intended as tax advice. Wealthfront Advisers and its affiliates do not provide legal or tax advice and do not assume any liability for the tax consequences of any client transaction. Clients should consult with their personal tax advisors regarding the tax consequences of investing with Wealthfront Advisers and engaging in these tax strategies, based on their particular circumstances.

The effectiveness of the tax-loss harvesting strategy to reduce the tax liability of the client will depend on the client’s entire tax and investment profile, including purchases and dispositions in a client’s (or client’s spouse’s) accounts outside of Wealthfront Advisers and type of investments (e.g., taxable or nontaxable) or holding period (e.g., short- term or long-term).

Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and the strategy could introduce portfolio tracking error into your account. Tracking error is a measure of financial performance that determines the difference between the return fluctuations of an investment portfolio and the return fluctuations of a chosen benchmark. There may also be unintended tax implications.

Wealthfront Advisers’ investment strategies, including portfolio rebalancing and tax loss harvesting, can lead to high levels of trading. High levels of trading could result in (a) bid-ask spread expense; (b) trade executions that may occur at prices beyond the bid ask spread (if quantity demanded exceeds quantity available at the bid or ask); (c) trading that may adversely move prices, such that subsequent transactions occur at worse prices; (d) trading that may disqualify some dividends from qualified dividend treatment; (e) unfulfilled orders or portfolio drift, in the event that markets are disorderly or trading halts altogether; and (f) unforeseen trading errors. The performance of the new securities purchased through the tax-loss harvesting service may be better or worse than the performance of the securities that are sold for tax-loss harvesting purposes.

Tax loss harvesting may generate a higher number of trades due to attempts to capture losses. There is a chance that trading attributed to tax loss harvesting may create capital gains and wash sales and could be subject to higher transaction costs and market impacts. In addition, tax loss harvesting strategies may produce losses, which may not be offset by sufficient gains in the account and may be limited to a $3,000 deduction against income. The utilization of losses harvested through the strategy will depend upon the recognition of capital gains in the same or a future tax period, and in addition may be subject to limitations under applicable tax laws, e.g., if there are insufficient realized gains in the tax period, the use of harvested losses may be limited to a $3,000 deduction against income and distributions. Losses harvested through the strategy that are not utilized in the tax period when recognized (e.g., because of insufficient capital gains and/or significant capital loss carryforwards), generally may be carried forward to offset future capital gains, if any.

Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

Investment management and advisory services–which are not FDIC insured–are provided by Wealthfront Advisers LLC (“Wealthfront Advisers”), an SEC-registered investment adviser, and financial planning tools are provided by Wealthfront Software LLC (“Wealthfront”). Brokerage products and services are offered by Wealthfront Brokerage LLC, member FINRA / SIPC. All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. Please see our Full Disclosure for important details.

Wealthfront Advisers, Wealthfront Brokerage and Wealthfront are wholly owned subsidiaries of Wealthfront Corporation.

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