An Empirical Evaluation of Tax-Loss Harvesting Alpha

Abstract

Advances in financial technology have made tax-loss harvesting strategies more feasible for retail investors. We evaluate the magnitude of this “tax alpha” using historical data from the Center for Research in Securities Prices monthly database for the 500 securities with the largest market capitalization from 1926 to 2018. Given long- and short-term capital gains tax rates of 15% and 35%, respectively we find that a tax-loss harvesting strategy yields a tax alpha of 1.10% per year from 1926 to 2018. When constrained by the wash sale rule, the tax alpha decreases from 1.10% per year to 0.85% per year.

Keywords: Tax-Loss Harvesting; Tax Optimization; Tax Alpha; Tax-Aware Investing

JEL Classification: G11, G12, H26