RT Journal Article
SR Electronic
T1 Optimal Tax Management of Municipal Bonds
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 85
OP 94
DO 10.3905/jpm.2014.41.1.085
VO 41
IS 1
A1 Andrew Kalotay
YR 2014
UL https://pm-research.com/content/41/1/85.abstract
AB Municipal bonds are held in taxable accounts because the interest is tax-exempt, but gains and losses are subject to complex tax treatment. The author explains how selling at a loss when the market value falls below the investor’s tax basis can improve after-tax performance. The hold value, which can differ substantially from the market price, is a key part of calculating the potential benefit from sale. The difference between the sale proceeds and the hold value shows the benefit of selling. If the benefit is positive, the question is whether to act now or wait for a possibly better opportunity. The answer lies in the transaction’s tax efficiency, which compares the benefit captured to the value of the tax option (i.e., the right to take a tax loss at any time). The latter’s value depends on interest-rate volatility and transaction costs. The author recommends selling only if the benefit captures a high percentage of the forfeited tax option (i.e., if the tax efficiency is sufficiently high).TOPICS: Portfolio construction, volatility measures, exchanges/markets/clearinghouses