RT Journal Article
SR Electronic
T1 Option-Enhanced Tax-Smart Portfolio Value
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 182
OP 188
DO 10.3905/jpm.2022.1.341
VO 48
IS 5
A1 Andrew Kalotay
YR 2022
UL https://pm-research.com/content/48/5/182.abstract
AB 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.