Does it Pay to Realize Tax Losses at the Year-End?

42 Pages Posted: 19 Jan 2013 Last revised: 4 Mar 2014

See all articles by Adam Y.C. Lei

Adam Y.C. Lei

Midwestern State University

Huihua Li

St. Cloud State University

Date Written: June 17, 2013

Abstract

Motivated by the widely touted practice, we examine the effects of realizing tax losses at the year-end on simulated stock portfolios. Our results indicate that the timing of portfolio formation, the cutoff that triggers the loss realization, the length of an investor’s holding period, and to a lesser extent, the timing of the tax benefits, all affect the probability that the tax-loss strategy outperforms a simple buy-and-hold strategy. Collectively our findings support the tax-loss strategy in general, but they also suggest that factors other than an investor’s applicable tax rate affect the effectiveness of this strategy as well.

Keywords: Investment strategy, tax-loss selling, simulation

JEL Classification: G11, G17

Suggested Citation

Lei, Adam Y.C. and Li, Huihua, Does it Pay to Realize Tax Losses at the Year-End? (June 17, 2013). Financial Services Review, Vol. 22, No. 3, pp. 187-209, 2013, Available at SSRN: https://ssrn.com/abstract=2179690 or http://dx.doi.org/10.2139/ssrn.2179690

Adam Y.C. Lei (Contact Author)

Midwestern State University ( email )

3410 Taft Blvd
Wichita Falls, TX 76308
United States
(940) 397-4403 (Phone)
(940) 397-4693 (Fax)

HOME PAGE: http://www.adamyclei.com/

Huihua Li

St. Cloud State University ( email )

Saint Cloud, MN 56301
United States
(320) 308-3231 (Phone)
(320) 255-3986 (Fax)

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