Taxable and Tax-Deferred Investing with the Limited Use of Losses

Review of Finance 21(5), 1847-1873 (2016)

32 Pages Posted: 19 May 2013 Last revised: 29 Sep 2017

See all articles by Marcel Fischer

Marcel Fischer

Copenhagen Business School

Michael F. Gallmeyer

University of Virginia (UVA) - McIntire School of Commerce

Date Written: June 16, 2016

Abstract

We study the impact of the different tax treatment of capital gains and losses on the optimal location of assets in taxable and tax-deferred accounts. The classical result of Black (1980) and Tepper (1981) suggests that investors should follow a strict pecking-order asset location rule and hold those assets that are subject to the highest tax rate preferentially in tax-deferred accounts. We show that with the different tax treatment of realized gains and losses, only tax-efficient equity mutual funds are optimally held in taxable accounts whereas mutual funds with average tax-(in)efficiency are preferentially held in tax-deferred accounts.

Keywords: portfolio choice, limited use of capital losses, tax-deferred investing, asset location

JEL Classification: G11, H24

Suggested Citation

Fischer, Marcel and Gallmeyer, Michael F., Taxable and Tax-Deferred Investing with the Limited Use of Losses (June 16, 2016). Review of Finance 21(5), 1847-1873 (2016), Available at SSRN: https://ssrn.com/abstract=2266895 or http://dx.doi.org/10.2139/ssrn.2266895

Marcel Fischer (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
+45-3815-3628 (Phone)

Michael F. Gallmeyer

University of Virginia (UVA) - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-243-4043 (Phone)
434-924-7074 (Fax)

HOME PAGE: http://www.commerce.virginia.edu/faculty_research/facultydirectory/Pages/Gallmeyer.aspx

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