Taxable and Tax-deferred Investing with the Limited Use of Losses

Marcel Fischer, Michael Gallmeyer

Research output: Contribution to journalJournal articleResearchpeer-review

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Abstract

We study the impact of the different tax treatment of capital gains and losses on the optimal location of assets in taxable and tax-deferred accounts. The classical result of Black (1980) and Tepper (1981) suggests that investors should follow a strict pecking order asset location rule and hold those assets that are subject to the highest tax rate preferentially in tax-deferred accounts. We show that with the different tax treatment of realized gains and losses, only tax-efficient equity mutual funds are optimally held in taxable accounts, whereas mutual funds with average tax-(in)efficiency are preferentially held in tax-deferred accounts.
Original languageEnglish
JournalReview of Finance
Volume21
Issue number5
Pages (from-to)1847-1873
Number of pages27
ISSN1572-3097
DOIs
Publication statusPublished - Sep 2017

Bibliographical note

Published online: September 25, 2016

Keywords

  • Portfolio choice
  • Limited use of capital losses
  • Tax-deferred investing
  • Asset location

Cite this

Fischer, Marcel ; Gallmeyer, Michael. / Taxable and Tax-deferred Investing with the Limited Use of Losses. In: Review of Finance. 2017 ; Vol. 21, No. 5. pp. 1847-1873.
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Taxable and Tax-deferred Investing with the Limited Use of Losses. / Fischer, Marcel; Gallmeyer, Michael.

In: Review of Finance, Vol. 21, No. 5, 09.2017, p. 1847-1873.

Research output: Contribution to journalJournal articleResearchpeer-review

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