Enhancing Active Tax Management through the Realization of Capital Gains

Abstract

The authors explore the tax-management strategy of realizing long-term capital gains in a portfolio of equities and quantify how much it can add to after-tax performance. This approach is counter to the more common strategy of deferring the realization of capital gains as long as possible while only realizing capital losses. They evaluate the associated costs and benefits: Benefits accrue if there is a large difference between tax rates on long-term and short-term gains, if the investor has a surfeit of short-term gains that are generated possible.

TOPICS: Security analysis and valuation, legal/regulatory/public policy, performance measurement