An Empirical Evaluation of Tax-Loss-Harvesting Alpha

Shomesh E. Chaudhuri, Terence C. Burnham and Andrew W. Lo

Financial Analysts Journal, 2020, vol. 76, issue 3, 99-108

Abstract: Advances in financial technology have made tax-loss harvesting more feasible for retail investors than such strategies were in the past. We evaluated the magnitude of this “tax alpha” with the use of historical data from the CRSP monthly database for the 500 securities with the largest market capitalizations from 1926 to 2018. Given long-term and short-term capital gains tax rates of 15% and 35%, respectively, we found that a tax-loss-harvesting strategy yielded a before-transaction-cost tax alpha of 1.08% per year for our sample period. When the strategy was constrained by the “wash sale rule,” the tax alpha decreased from 1.08% per year to 0.82% per year.Disclosure: The authors report no conflicts of interest. Editor’s Note This article was externally reviewed using our double-blind peer-review process. When the article was accepted for publication, the authors thanked the reviewers in their acknowledgments. Andrew Berkin and one anonymous reviewer were the reviewers for this article.Submitted 3 February 2020Accepted 14 April 2020 by Stephen J. Brown

Date: 2020
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DOI: 10.1080/0015198X.2020.1760064

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