Does it pay to realize tax losses at the year-end?

Abstract

Motivated by the widely touted practice, we examine the effects of realizing tax losses at the year-end on simulated stock portfolios. Our results indicate that the timing of portfolio formation, the cutoff that triggers the loss realization, the length of an investor's holding period, and to a lesser extent, the timing of the tax benefits, all affect the probability that the tax-loss strategy outperforms a simple buy-and-hold strategy. Collectively, our findings support the tax-loss strategy in general, but they also suggest that factors other than an investor's applicable tax rate affect the effectiveness of this strategy as well.