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- Title
Option-Enhanced Tax-Smart Portfolio Value.
- Authors
Kalotay, Andrew
- Abstract
Tax-loss harvesting is an investor-specific option. The tax-smart value of an asset, which is defined as the greater of its after-tax liquidation value and hold value, reveals the intrinsic value of the tax-loss harvesting option. This article focuses on the time value of the tax-loss harvesting option, which affects expected performance. We demonstrate how a manager can achieve superior after-tax performance by structuring portfolios rich in tax optionality. Two features contribute to performance enhancement: restarting the short-term clock, and strategic security selection. Restarting the short-term clock utilizes the higher applicable tax rate in the event of short-term loss. Security selection is motivated by the recognition that certain structures (such as tax-exempt bonds trading at a premium) are more suitable than others (such as bonds trading near par) for tax-loss harvesting.
- Publication
Journal of Portfolio Management, 2022, Vol 48, Issue 5, p182
- ISSN
0095-4918
- Publication type
Academic Journal
- DOI
10.3905/jpm.2022.1.341