Tax-loss harvesting under uncertainty

Daniel McKeever and Kristian Rydqvist

Journal of Banking & Finance, 2022, vol. 140, issue C

Abstract: We provide market-based evidence that a capital loss that is realized in the beginning of the year is less valuable than a loss that is taken at the end of the year. A simple binomial tree model that captures the resolution of tax rate uncertainty closely mimics observed market prices. Tax rate uncertainty arises from not knowing until the end of the calendar year whether the investor will have realized sufficient capital gains to fully benefit from losses harvested early in the year. We conclude that tax rate uncertainty influences investor behavior.

Keywords: Capital gains tax; Tax options; Tax planning; Seasonality; Real option pricing (search for similar items in EconPapers)
JEL-codes: G12 H24 H26 H31 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:140:y:2022:i:c:s0378426622001224

DOI: 10.1016/j.jbankfin.2022.106528

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