Optimal Rebalancing for Taxable Portfolios

Abstract

The authors focus on the issue of rebalancing taxable portfolios and overcoming the capital gains lock-in effect. They propose an integer linear program, developed to maximize the expected after-tax return over a desired planning horizon, given an initial portfolio with unrealized gains and losses. They then offer an integer quadratic program, developed for minimizing the variance of the return given an initial portfolio with unrealized gains and losses. They conclude by suggesting that these models allow investors to explicitly take into consideration their personal tax situation when rebalancing their portfolios.