Tax-Loss Harvesting Under Uncertainty

38 Pages Posted: 16 Mar 2021

See all articles by Daniel McKeever

Daniel McKeever

SUNY at Binghamton - School of Management

Kristian Rydqvist

State University of New York at Binghamton - School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: January 26, 2021

Abstract

Numerical calculations imply that tax-loss harvesting is valuable to holders of taxable stock accounts. These calculations are based on the assumption that a capital loss on a stock portfolio can always be netted against ordinary income (up to a limit) or a capital gain on the same stock portfolio. We provide market-based evidence that a capital loss that is realized in the beginning of the year is substantially less valuable than a loss that is taken at the end of the year. A simple binomial tree model that captures the resolution of tax rate uncertainty closely mimics observed market prices. Allowing investors to postpone unused losses into the future does not alter the conclusion that realized losses are less valuable early in the year.

Keywords: capital gains tax, tax options, tax planning, seasonality, real options

JEL Classification: G12, H24, H26, H31

Suggested Citation

McKeever, Daniel and Rydqvist, Kristian, Tax-Loss Harvesting Under Uncertainty (January 26, 2021). Available at SSRN: https://ssrn.com/abstract=3775677 or http://dx.doi.org/10.2139/ssrn.3775677

Daniel McKeever (Contact Author)

SUNY at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States

Kristian Rydqvist

State University of New York at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States
607-777-2673 (Phone)
607-777-4422 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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