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Taxable and Tax-Deferred Investing with the Limited Use of Losses

Marcel Fischer and Michael Gallmeyer ()

Review of Finance, 2017, vol. 21, issue 5, 1847-1873

Abstract: We study the impact of the different tax treatment of capital gains and losses on the optimal location of assets in taxable and tax-deferred accounts. The classical result of Black (1980) and Tepper (1981) suggests that investors should follow a strict pecking order asset location rule and hold those assets that are subject to the highest tax rate preferentially in tax-deferred accounts. We show that with the different tax treatment of realized gains and losses, only tax-efficient equity mutual funds are optimally held in taxable accounts, whereas mutual funds with average tax-(in)efficiency are preferentially held in tax-deferred accounts.

Keywords: Portfolio choice; Limited use of capital losses; Tax-deferred investing; Asset location (search for similar items in EconPapers)
JEL-codes: G11 H24 (search for similar items in EconPapers)
Date: 2017
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