Fixed-Income Tax-Loss Harvesting Opportunities: Don’t Wait
Tax-loss harvesting is often treated as a year-end exercise. But markets don’t follow the calendar. Today’s fixed-income landscape offers compelling potential opportunities to harvest losses, manage tax liabilities and improve yield and tax efficiency.
Key Takeaways
Higher nominal and real yields have pressured legacy bond values, creating potential to harvest losses and offset gains.
We believe now is the time to assess cost basis, unrealized losses and current income potential across taxable accounts.
Corporate and municipal (muni) sectors offer fertile ground to redeploy into exchange-traded funds (ETFs) with attractive yields, costs and tax efficiency.
Stubborn inflation, decades of increased global debt and geopolitical uncertainty have materially pushed up nominal and real yields, devaluing many legacy bond holdings (older bonds issued before changes in tax laws or regulations). At the same time, equity investors are dealing with record-high valuations and historical extremes in market concentration.
Today’s fixed-income environment may offer investors a timely opportunity to realize bond losses, offset capital gains elsewhere in their portfolios and potentially reduce their tax bills. They they may be able to redeploy assets into bond ETFs that offer more attractive yields, as well as cost and tax efficiency.
We believe now’s the time to review existing cost basis, unrealized losses and current income potential across taxable accounts.
Higher Yields Have Reset the Bond Landscape
The Treasury curve is a key reference point for the broader bond market. When it resets higher, it can push up yields—and leave existing bonds with unrealized losses—across fixed-income sectors. The chart below shows the increase in Treasury yields since the start of 2026.
U.S. Treasury Curves
Data from 7/31/2026. Source: FactSet, Bloomberg. Past performance is no guarantee of future results.
Timely Look at Municipal Bonds
Municipal bonds experienced one of the worst Julys in the past 20 years. The backup in yields has created a potentially compelling swap opportunity for municipal investors: realize losses, reinvest at higher income levels and reposition into an actively managed strategy designed to capitalize on evolving market opportunities.
TAXF - American Century Diversified Municipal Bond ETF is a research-driven, actively managed ETF that offers potential for enhanced tax-advantaged income and risk-adjusted return by pursuing flexible municipal bond market coverage that focuses on investment-grade securities, with the ability to dynamically allocate up to 35% to below investment grade.
CATF - American Century California Municipal Bond ETF is a research-driven, actively managed ETF seeking high current income that is exempt from federal and California income tax. It maintains a focus on investment-grade securities, with the ability to dynamically allocate up to 35% to below investment grade.
Learn more: Municipal Bonds and Taxes: Key Considerations for Investors
Timely Look at Corporate Bonds
Credit spreads remain tight, making issuer selection, sector dispersion, rate volatility and event risk more important than broad credit beta. Weakness has been more pronounced in lower-quality credit, reinforcing the need for disciplined credit selection and active management.
KORP - American Century Diversified Corporate Bond ETF seeks enhanced returns and current income by emphasizing intermediate-term, investment-grade bonds while dynamically allocating up to 35% of the portfolio to high yield.
As one of the first active fixed-income ETFs in the industry, KORP features a five-year+ track record and was the leader in AUM and net flows in the Morningstar Corporate Bond Category.
Source: Morningstar data for AUM and net flows based on 48 issued ETFs overall (18 of which are active fixed-income ETFs) in the Corporate Bond Category as of 6/30/2026.
Learn more about bonds in today’s market environment: How Do Corporate Bonds React to Market Volatility?
Tax-loss harvesting involves selling an investment that has declined below its tax cost basis and using the realized loss to offset capital gains elsewhere in the portfolio. This reduces the amount of capital gains that is subject to taxation. The proceeds can then be reinvested into a similar but not substantially identical investment to preserve market exposure in potentially more profitable securities. Click here to learn more about the wash sale rule.
Learn more: Tax-Loss Harvesting With ETFs: A Guide to Lowering Your Tax Bill
Why Reinvest in Bond ETFs After Tax-Loss Harvesting?
Many investors choose to invest in ETFs after tax-loss harvesting because they offer cost-efficient market exposure and are designed to minimize taxable events. Features of the ETF structure can improve tax efficiency and generally result in fewer capital gains distributions than mutual funds.
Because ETFs generally don’t need to sell bonds to meet daily redemptions, they are less likely to realize gains during routine portfolio management. An investor selling ETF shares doesn’t force the fund to sell bonds. Therefore, liquidity for the investor doesn’t translate into taxable activity for the fund.
Learn more: Why Active Fixed-Income ETFs May Make Sense in Today's Bond Market
The Cost of Inaction: Don’t Wait to Tax-Loss Harvest
Tax-loss harvesting should not be limited to December. We believe with fixed-income valuations reset, yields more compelling and bond opportunities evolving, investors can benefit from reviewing portfolios now. Realizing losses today can help reduce current and future tax liabilities and reposition portfolios for higher income potential and tax efficiency while remaining aligned with their risk profile and long-term objectives.
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Senior Portfolio Manager
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Exchange Traded Funds (ETFs) are bought and sold through exchange trading at market price (not NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns.
The IRS wash sale rule prohibits claiming a loss on the sale of a security if the investor purchases a “substantially identical” security 30 days before or after the sale.
Long- and short-term capital gains are taxed at different rates. Long-term gains may only be offset by longer-term losses. Likewise, short-term gains may only be offset by short-term losses.
IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
These funds are actively managed ETFs that do not seek to replicate the performance of a specified index. To determine whether to buy or sell a security, the portfolio managers consider, among other things, various fund requirements and standards, along with economic conditions, alternative investments, interest rates and various credit metrics. If the portfolio manager considerations are inaccurate or misapplied, the fund's performance may suffer.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Generally, as interest rates rise, the value of the bonds held in the fund will decline. The opposite is true when interest rates decline.
Diversification does not assure a profit nor does it protect against loss of principal.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
TAXF, CATF:
Even though a tax-free bond fund is designed to purchase assets exempt from federal taxes, there is no guarantee that all of the fund’s income will be exempt from federal income tax or the federal alternative minimum tax (AMT). Fund managers may invest assets in debt securities with interest payments that are subject to federal income tax and/or federal AMT. State and local taxes may also apply.
CATF:
Because the fund invests primarily in California municipal securities and securities issued by U.S. territories, its yield and share price will be affected by political and economic developments within the state and territories.
There is no guarantee that all of the fund’s income will be exempt from federal, California state or local income taxes. The portfolio managers are permitted to invest the fund’s assets in debt securities with interest payments that are subject to federal income tax, California state tax, local income tax and/or the federal alternative minimum tax. Capital gains are not exempt from state and federal income tax.
Exchange Traded Funds (ETFs): Foreside Fund Services, LLC - Distributor, not affiliated with American Century Investment Services, Inc.