Taxes and the Investment Horizon

Zivney, Terry L.; Hoban, James P.; Ledbetter, John H.
November 2002
Journal of Financial Planning;Nov2002, Vol. 15 Issue 11, p84
Academic Journal
This article examines the impact of taxes on investments by studying three scenarios, including buy and hold, realizing short-term losses only while deferring gains indefinitely and realizing long-term gains and short-term losses. Taxes are important to investors, and affect investors in many ways because of the many different types of taxes. Numerous investment studies have incorporated the effects of income taxes, including taxes on dividends and capital gains and estate taxes. In most cases, the researchers have assumed that a particular tax regime holds while computing after-tax returns. Taxable investors should follow the basic tax-harvesting strategy. This strategy recognizes all losses each year, but defers gains indefinitely. Investors who make new investments of less than approximately $25,000 to $50,000 a year are unlikely to find the $3,000 limit on net realized losses to materially affect the advantage to this strategy. The greater the risk relative to the expected return, the greater the advantage to the strategy. The longer the investment horizon, the greater the advantage to the strategy. But even holding periods as short as two years will likely benefit from the tax harvesting approach. The results include the impact of commissions. Considerations of estate taxes and the step-up of basis at death have no impact on the conclusion that tax harvesting is beneficial.


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