Tax Loss Harvesting in Quarter 1?

Posted: 19 Apr 2006

See all articles by Howard Marmorstein

Howard Marmorstein

University of Miami - Department of Marketing

John Charnes

University of Kansas - School of Business

Joseph Johnson

University of Miami - Department of Marketing

Dan Sarel

University of Miami - Department of Marketing

Abstract

This paper is among the first to look systematically at the timing of the tax loss harvesting decision faced by investors. A conceptual explanation of the trade-off between tax savings and incremental transaction costs, which underlies the tax loss harvesting decision, is offered. A simulation study is used to show how three variables - the investor's tax rate and transaction costs, and the time of year that a loss is incurred - interact to determine the potential benefit of harvesting a loss early (i.e., not waiting until year-end). The results show that tax loss harvesting can be highly beneficial early in the year (e.g., January) while it is often counter-productive later in the year, contrary to the way that tax loss harvesting is widely understood and practiced. Suggestions for future research, including the need to test the generalizability of these findings to fixed income assets, and implications for investment management are provided.

JEL Classification: H24

Suggested Citation

Marmorstein, Howard and Charnes, John and Johnson, Joseph and Sarel, Dan, Tax Loss Harvesting in Quarter 1?. Journal of Taxation of Investment, Vol. 23, p. 152, Winter 2006. Available at SSRN: https://ssrn.com/abstract=896793

Howard Marmorstein (Contact Author)

University of Miami - Department of Marketing ( email )

P.O. Box 248126
Florida
Coral Gables, FL 33124
United States

John Charnes

University of Kansas - School of Business ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States

Joseph Johnson

University of Miami - Department of Marketing ( email )

United States

Dan Sarel

University of Miami - Department of Marketing ( email )

P.O. Box 248126
Florida
Coral Gables, FL 33124
United States

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