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

Marcel Fischer, Michael Gallmeyer

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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
Issue number5
Pages (from-to)1847-1873
Number of pages27
Publication statusPublished - Sep 2017

Bibliographical note

Published online: September 25, 2016


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

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