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Marcel Fischer, Michael Gallmeyer, Taxable and Tax-Deferred Investing with the Limited Use of Losses, Review of Finance, Volume 21, Issue 5, August 2017, Pages 1847–1873, https://doi.org/10.1093/rof/rfw047
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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.