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Tax-loss harvesting under uncertainty

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  • McKeever, Daniel
  • Rydqvist, Kristian

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.

Suggested Citation

  • McKeever, Daniel & Rydqvist, Kristian, 2022. "Tax-loss harvesting under uncertainty," Journal of Banking & Finance, Elsevier, vol. 140(C).
    • Handle: RePEc:eee:jbfina:v:140:y:2022:i:c:s0378426622001224
    DOI: 10.1016/j.jbankfin.2022.106528
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    More about this item

    Keywords

    Capital gains tax; Tax options; Tax planning; Seasonality; Real option pricing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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