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Overview of Tax Loss Harvesting

September 5, 2023 • Posted in Individual Investing

What is the best way to exploit U.S. federal government tax code allowing capital losses to offset current or future capital gains and up to $3,000 of current regular income? In his August 2023 paper entitled “Tax-Loss Harvesting: A Primer”, Harry Mamaysky discusses many features of tax loss harvesting, selling securities at a loss and replacing them with different (non-wash sale) but statistically similar stocks. In 10-year simulations, he assumes:

  • Statistically similar, non-wash sale assets are available to replace tax-loss sales.
  • The capital gain tax rate during the life of the strategy is 30%, with liquidation capital gain tax rate either 0% (charity or inheritance) or 20%.
  • The portfolio has no cash inflows from initial purchase through terminal date, with proceeds from tax loss sales allocated equally across pre-existing/replacement stocks and all stocks held at respective average cost bases.
  • Annual pairwise return correlation between stocks is 0.40, in line with historical evidence.
  • In some simulations, realized tax losses carry over to terminal portfolio liquidation. In others, realized tax losses offset capital gains from other accounts.

Based on these assumptions, he concludes that:

(more…)

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