TITLE

How Beneficial Is Tax-Loss Harvesting Using Portfolios of Individual Securities?

AUTHOR(S)
Osborn, Earl D.
PUB. DATE
February 2006
SOURCE
Journal of Financial Planning;Feb2006, Vol. 19 Issue 2, p78
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
• Tax-loss harvesting using a portfolio of individual securities, such as through a separately managed account (SMA), is increasingly popular On a pre-cost basis, it can appear very beneficial. But this study shows that several factors can significantly reduce the perceived benefit • First it's important to understand that tax-loss harvesting in most cases only defers taxation, unless the taxpayer dies and there is a step-up in basis, or the taxpayer realizes a short-term loss but ultimately a long-term gain. • The author estimates the potential value of this tax deferral by running Monte Carlo simulations and assuming, among other things, that short-term losses are offset against short-term gains. Tax savings are invested in a safe-rate fund equal to the return of three-month Treasury bills. Adjustments are also made for different correlation scenarios. • Under the conditions outlined in the paper the tax benefits of tax-loss harvesting of a portfolio of individual securities is 0.99 percent in annual after-tax return. But this is before costs. Costs that reduce the tax benefits include transaction costs and higher management fees generally associated with SMAs versus an index mutual fund. • Changes in certain circumstances can influence, positively or negatively the benefits of tax-loss harvesting. The benefits decline, for example, (1) the lower the volatility, (2) the lower the ordinary tax rates, (3) the more that losses offset long-term rather than short-term gains, (4) the lower the future stock returns, or (5) the greater that the percentage of return is based on price appreciation versus dividends. INSET: Executive Summary.
ACCESSION #
19617017

 

Related Articles

  • System testing via Monte Carlo. von Ronik, Wolf // Futures: News, Analysis & Strategies for Futures, Options & Deri;Apr2001, Vol. 30 Issue 5, p44 

    Describes the application of the Monte Carlo simulation method for trading securities. Imaginary problem from random to deterministic; Strategies to survey the situation; Steps recommended for validating the trading system.

  • Performance of Active Extension Strategies: Evidence from the Australian Equities Market. Segara, Reuben; Das, Abhishek; Turner, James // Australasian Accounting Business & Finance Journal;2012, Vol. 6 Issue 3, p3 

    This study examines the performance of several active extension strategies, commonly known as 130/30, in the Australian equities market. A detailed analysis of the factors affecting performance is explored using Monte Carlo simulations based on eight years of historical returns for the...

  • LETTERS.  // Clergy Journal;Oct2003, Vol. 80 Issue 1, p28 

    Replies to a query on the taxation of a devalued stock under the "wash-sale rule" in the U.S. Loss of deduction in case of the repurchase of an investment.

  • Is your investment income taxable? Lockhart, Jim // Alberta Sweetgrass;Feb2000, Vol. 7 Issue 3, p14 

    Reports the taxation of investment income among First Nation people in Canada. Nature of investment securities; Uses of investment income; Capital used in buying securities.

  • Harvesting capital gains and losses. Smith, Margaret Hwang; Smith, Gary // Financial Services Review;Winter2008, Vol. 17 Issue 4, p309 

    Monte Carlo simulations are used to demonstrate that a very attractive tax-based trading strategy is to realize all capital losses, using excess losses to oft]set realized gains to rebalance the portfolio. This strategy increases the mean and median return by taking advantage of the...

  • Assessing the impact of taxes on female labor supply using a finite mixture approach. Ericson, Peter; Hansen, Jörgen // Empirical Economics;2000, Vol. 25 Issue 2, p279 

    Abstract. This paper expands the standard analysis of female labor supply to permit preference heterogeneity by using a finite mixture model. Using the extended model, we obtain theory consistent results whereas a traditional model produces a negative substitution effect. We use our model to...

  • A MONTE CARLO EXPLORATION OF THE VERTICAL PROPERTY TAX INEQUITY MODELS: SEARCHING FOR A 'BEST' MODEL. Fairbanks, Joshua C.; Goebel, Paul R.; Morris, Michael D. S.; Dare, William H. // Journal of Real Estate Literature;2013, Vol. 21 Issue 1, p3 

    We apply vertical inequity models to real estate data from Lubbock, Texas. We use Monte Carlo simulations to explore the performance of each inequity model. We generate eight different contrived inequity patterns from three different data-generating processes, which create 24 stylized data sets....

  • An Analysis of ACRS During Inflationary Periods. Swenson, Charles W. // Accounting Review;Jan1987, Vol. 62 Issue 1, p117 

    ABSTRACT: The neutrality and equity aspects of the Accelerated Cost Recovery System (ACRS), which became part of the U.S. tax law in 1981, are examined using a Monte Carlo simulation. ACRS depreciation is found to be equivalent to general price-level adjusted (GPL) depreciation only at inflation...

  • Sustainable Retirement Spending For a Couple. Pye, Gordon B. // Journal of Financial Planning;Jul2000, Vol. 13 Issue 7, p84 

    Discusses the process of developing spending plans for retired couples and surviving spouses in the United States based on Social Security benefits and investments. Ways to increase a couple's retirement spending; How to evaluate the amount a couple can spend in retirement; Features of the...

Share

Read the Article

Courtesy of VIRGINIA BEACH PUBLIC LIBRARY AND SYSTEM

Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics