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Beyond Tax-Loss Harvesting: Maximizing Effective Returns by Accelerated Recognition of Long-Term Gains  


Author:  Howard Marmorstein.; John Charnes.; Joseph Johnson.; Dan Sarel.


Source: Volume 25, Number 01, Fall 2007 , pp.77-89(13)




Journal of Taxation of Investments

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Abstract: 

The individual seeking to maximize effective returns on taxable assets faces an array of conflicting investment advice. One school of thought advocates passive investing, usually by means of indexing, in order to minimize the costs of trading and taxes. A second school of thought, which is gaining in both theoretical support and prevalence in practice, recommends some form of active tax management. Tax-managed funds, for example, engage in tax-loss harvesting to offset some or all of their realized capital gains. While active tax management necessitates greater transaction costs, it seeks to enhance investors’ effective (i.e., after-tax) returns by lowering the annual tax burden. A third approach, which has received far less research attention or support, entails recognition of both short-term losses and long-term gains. The primary purposes of this article are to examine this hyperactive approach and test whether there might be circumstances in which investors can expect to benefit materially from its implementation.

Keywords: 

Affiliations:  1: University of Miami School of Business Administration; 2: University of Kansas School of Business; 3: University of Miami School of Business Administration; 4: University of Miami School of Business Administration.

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