This class action centers on a feature in an investment account called tax-loss harvesting. The complaint alleges that TD Ameritrade Holding Corporation and three of its Ameritrade subsidiaries are responsible for losses in an account that was managed by Ameritrade when the tax-loss harvesting feature did not work as intended.
The class for this action is all Ameritrade’s clients who have taxable brokerage accounts with an activated tax-loss harvesting feature, in Essential or Selective managed portfolios, whose account had an automatic tax-loss harvesting sale at any time when a position in a similar, but not substantially identical, ETF was not promptly purchased, which resulted in a loss of value to the account, from November 15, 2017 through the pendency of this action.
Bernard A. Knowles shared an Ameritrade account with his son Russell D. Knowles. The account trades in exchange-traded funds (ETFs), which generally try to match the performance of a market index, asset class, or sector, for example, the market index called S&P 500. Ameritrade can buy and sell units without getting approval as long as the trades are in line with the Knowles’s general investment strategy.
If an account earns money, the customer who owns it must pay taxes on the gains. The tax-loss harvesting feature is meant to reduce the amount of tax owed. Ameritrade’s systems search for an ETF in the account that has declined in price. It then sells it. However, securities that fall may rise again, so Ameritrade then buys units of a similar EFT so that the customer can benefit when prices rise again.
Why not repurchase the same security? There’s a law called the “wash sale rule” that forbids investors from taking a loss on a security if they buy the same security again within thirty days.
The complaint claims that the problem arose because Ameritrade did not have enough options to avoid the wash sale rule and still implement its tax-loss harvesting. In December 2018, Ameritrade sold units from the Knowles’s account, but it could not immediately replace them with a similar option. The reason? It had only one similar option and it had sold that EFT from the Knowles’s account in tax-loss harvesting less than thirty days before.
Because of that, the complaint says, instead of buying a similar a similar option immediately, Ameritrade simply waited for eighteen days, until it could avoid the problem of the wash sale rule. During those eighteen days, the complaint says, the market recovered and the account did not get the benefit of the rise in price.
The complaint claims that Ameritrade either should have had sufficient options available or should not have sold the units at a loss when it had no replacement options. The complaint claims breach of contract and negligence.