Investing Simple is affiliated with M1 Finance. This relationship does not influence our opinion of this platform.
One of the cons of the M1 Finance platform is that they do not offer tax loss harvesting. While this is one of the only cons I see for this platform, it is still worth mentioning. Roboadvisors like Wealthfront and Betterment offer a feature called tax loss harvesting. This is simply the process of selling a security that has experienced a loss and buying back a similar security. As a result, a capital loss is recognized and this can be used to offset capital gains from your investments.
These realized capital losses can offset capital gains and reduce your ordinary taxable income by up to $3,000 per year. If you have more than $3,000 in capital losses, they can be recognized across multiple years.
It is common for roboadvisors to offer automated tax loss harvesting, however these platforms like Wealthfront and Betterment charge a fee for using the platform. Both Betterment and Wealthfront charge a 0.25% annual management fee, while M1 Finance does not have any fees associated with the platform.
You may be asking yourself, so how do they make money? M1 Finance makes money in a way similar to Robinhood, by directing order flow and offering margin to investors.
Now, before you write off M1 Finance we need to talk about what they offer instead. M1 Finance offers a feature known as Tax Minimization. This is essentially a simplified version of the tax loss harvesting offered by other roboadvisors.
When you request a withdrawal from your M1 Finance account, the investments will be sold in the most tax efficient way possible.
If an asset is held for one year or less, the capital gain recognized on that investment is considered to be a short term capital gain. This type of capital gain is taxed at the highest rate possible, typically the same rate as your ordinary income tax rate.
If an asset is held for over one year, the capital gain recognized on that investment is considered to be a long term capital gain. This type of capital gain is taxed at a lower tax rate.
When you withdraw money from your M1 Finance account, your investments are sold in this order:
- Losses that offset capital gains
- Securities or groups of securities that result in long term capital gains (lower tax rate)
- Securities or groups of securities that result in short term capital gains (higher tax rate)
For some investors, the tax loss harvesting offered by other roboadvisors is worth paying for the annual management fee. However, if you are looking to take advantage of this tax minimization M1 Finance offers this for free.