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Tax Matters

The Enduring Appeal of Gain Deferral, Part 2

Our previous post showed the power of deferral for building wealth, but one key assumption in that analysis was that tax rates remain constant. In this post, we discuss whether gain deferral is still a good idea if you think tax rates might be higher in the future.

Tax Matters

The Enduring Appeal of Gain Deferral, Part 1

We find that strategies that help defer gains can be highly beneficial, irrespective of the investment horizon and especially over the long term.

Tax Matters

Inflation and Tax Efficiency

We discuss how inflation and taxes are linked, highlighting the value of tax efficiency when inflation is a feature of the macroeconomic environment.

Tax Matters

Looking Under the Hood of Long/Short Tax-Aware Strategies

Our recent paper discusses gain deferral and the benefits of tax-aware long/short equity factor strategies. It also suggests that when it comes to a diversified long/short equity factor strategy, the difference between a portfolio that cares about taxes and one that doesn’t may be smaller than you think.

Working Paper

Loss Harvesting or Gain Deferral? A Surprising Source of Tax Benefits of Tax-Aware Long-Short Strategies

We explore the mechanism for how tax-aware long-short factor strategies, within their first three years since inception, can realize cumulative net capital losses exceeding 100% of initially invested capital, all while generating a significant pre-tax alpha – a result shown in previous research. Surprisingly, we find in these strategies that net capital losses arise not from an increased realization of capital losses but rather from the deferral of capital gains, especially short-term gains on long positions.

Journal Article

Beyond Direct Indexing: Dynamic Direct Long-Short Investing

On average, net losses realized by direct indexing loss-harvesting strategies taper off within the first few years after their inception, and these strategies also exhibit a high dispersion of net loss outcomes. We show that long-short strategies motivated by factor investing can significantly outperform direct indexing strategies from both a pre-tax and tax perspective.

Tax Matters

Now You Don’t Have to Choose Between Diversification and Tax Efficiency

The additional requirement for individuals and families is for their diversifying strategies to be attractive not just pre-tax, but also net of taxes.

Tax Matters

Regardless of How You Deal with Low-Basis Stock, Long-Short Strategies Can Help

Most investors recognize that concentrated stock holdings are risky, but the outright sale of a low-basis stock incurs a punitive tax burden. In this post, we highlight several tax-efficient alternatives to an outright sale and explore how long/short strategies can help enhance this tax efficiency.

Journal Article

When Fortune Doesn’t Favor the Bold: Perils of Volatility for Wealth Growth and Preservation

Entrepreneurs and executives holding much of their wealth in a highly appreciated single stock face either the high risk of idiosyncratic volatility and potentially catastrophic losses, or selling stock and facing an immediate, punitive tax burden. This paper evaluates this choice and explains how it relates to classic betting strategies and economic theory, finding tax-efficient techniques might strike the balance between the urgency to diversify concentrated risk and aversion to taxes.

Journal Article

Taxes, Charity, and Hedge Funds: Tax Implications of Charitable Contributions of Leveraged Partnership Interests

As a result of recent Treasury regulations, investors in investment partnerships, such as hedge funds, might end up recognizing capital gains when they contribute their partnership interests to a charity. We explain how such taxable gains upon charitable contributions arise and quantify how punitive they might be.