Tax-Loss Harvesting: An Individual Investor’s Perspective

Tax-loss harvesting produces diverse outcomes depending on the profile of the individual investor and the return environment.

Overview

In the tax-loss harvesting literature, a typical investor is assumed to have an unlimited supply of offsetting capital gains and can earn annualized tax alpha on the order of 100 bps. Using boosted regression tree analysis and nationally representative investor-level data, we quantified how investor-characteristic and return environment differences yield significant heterogeneity in expected tax-loss harvesting benefits. Overall, investor profiles drive roughly 60% of the variation in tax-loss harvesting outcomes. Our findings demonstrate that investors (and their advisers) can better target who might (and might not) benefit from various tax-loss harvesting strategies based on individual profile differences.