What is tax loss harvesting worth?
Tax loss harvesting is one (and only one) of the powerful tax strategies that can increase the value of an equity investment portfolio. An academic study* estimated the benefits to be in the range of an additional 1.10% after-tax return each year.
The benefits can vary widely based on a number of factors, including the tax rates of the investor (short-term and long-term marginal capital gains tax rates):
Benefit
Tax Rate
1.32%
Highest tax rates (50% and 30%)
1.10%
Higher tax rates (35% and 15%)
0.86%
Lower tax rates (20% and 0%)
The benefits, also known as the “tax alpha,” are higher for an investor making regular deposits** into their account:
Benefit
% Deposit
1.27%
Monthly 2% deposits
1.10%
Monthly 1% deposits
0.73%
No monthly deposits
The estimated 1.10% tax alpha represents a 13% after tax increase compared to the 8.44% after tax return in the underlying equity portfolio without tax loss harvesting.
Compounded over 25 years, this would result in a 31.38% increase in the ending balance for investors in high tax rates (35% and 15%) making monthly deposits to their portfolios.
The analysis is for educational purposes only and nothing herein constitutes investment advice or an investment recommendation. The analysis assumes a 1% monthly deposit and a mean average return of 8.44%. It does not account for management fees, withdrawals, or variations in market performance. The estimates do not reflect actual investment results of an Evergreen portfolio and are not guarantees of future results. Please consult your tax advisor to see whether tax-loss harvesting is advisable with your accounts. Taxes should not be the only factor to drive an investment decision.
Tax loss harvesting is variable and tax alpha is subject to important assumptions and qualifications. However, combining tax loss harvesting with charitable donations and monthly contributions to the portfolio could increase the tax alpha.
*Source An Empirical Evaluation of Tax-Loss Harvesting Alpha” by Chaudhuri (MIT), Burnham (Chapman) and Lo (MIT)
**Deposits are a percentage of the gross benchmark portfolio value per month.