An Empirical Evaluation of Tax-Loss Harvesting Alpha

25 Pages Posted: 3 Apr 2019 Last revised: 10 Feb 2020

See all articles by Shomesh Chaudhuri

Shomesh Chaudhuri

Massachusetts Institute of Technology

Terence Burnham

Chapman University - The George L. Argyros School of Business & Economics; Chapman University The George L. Argyros School of Business & Economics

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering; Santa Fe Institute

Date Written: March 5, 2019

Abstract

Advances in financial technology have made tax-loss harvesting strategies more feasible for retail investors. We evaluate the magnitude of this “tax alpha” using historical data from the Center for Research in Securities Prices monthly database for the 500 securities with the largest market capitalization from 1926 to 2018. Given long- and short-term capital gains tax rates of 15% and 35%, respectively we find that a tax-loss harvesting strategy yields a tax alpha of 1.10% per year from 1926 to 2018. When constrained by the wash sale rule, the tax alpha decreases from 1.10% per year to 0.85% per year.

Keywords: Tax-Loss Harvesting; Tax Optimization; Tax Alpha; Tax-Aware Investing

JEL Classification: G11, G12, H26

Suggested Citation

Chaudhuri, Shomesh and Burnham, Terence C. and Lo, Andrew W., An Empirical Evaluation of Tax-Loss Harvesting Alpha (March 5, 2019). Available at SSRN: https://ssrn.com/abstract=3351382 or http://dx.doi.org/10.2139/ssrn.3351382

Shomesh Chaudhuri

Massachusetts Institute of Technology ( email )

77 Massachusetts Avenue
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Cambridge, MA 02139-4307
United States

Terence C. Burnham

Chapman University - The George L. Argyros School of Business & Economics ( email )

Orange, CA
United States

Chapman University The George L. Argyros School of Business & Economics ( email )

Orange, CA
United States

Andrew W. Lo (Contact Author)

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

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E62-618
Cambridge, MA 02142
United States
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781 891-9783 (Fax)

HOME PAGE: http://web.mit.edu/alo/www

Santa Fe Institute

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Santa Fe, NM 87501
United States

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