To help investors determine if the benefits of tax loss harvesting outweigh its costs in their circumstances.
Stock index mutual funds and ETFs are simple, cheap, and relatively tax-efficient. By increasing the opportunity for tax loss harvesting, a large portfolio of stocks offers the potential for greater tax efficiency, but also additional costs and complexity.
Few investors have the ability or desire to manage and harvest losses from a large portfolio. There is no shortage of professionals eager to do it for them. Our Tax Alpha Simulator enables the investor to determine if the increase in after-tax performance is sufficient to offset the manager's fees.
Claims that tax loss harvesting can increase annual after-tax returns by 1% to 2% are pervasive, but only true under specific assumptions that do not apply to most ordinary investors.
Taxpayers are only allowed to deduct $3,000 in realized capital losses each year. Losses in excess of this must be carried forward to future tax years. As a result, harvested losses are most valuable when they can be used immediately to offset short-term realized gains from other sources.
When estimating tax alpha, many marketers of tax loss harvesting strategies assume maximum tax rates and unlimited short-term gains available for offset.
Use our Tax Alpha Simulator to estimate the benefits given your tax rates and external gains.
ShadowBenchmark.com is provided by AlphaWorks,LLC, specialists in long/short tax-aware portfolio management.
Please send all questions and comments to luke.smith@alphaworksinfo.com
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