SEM217: Andrew Kalotay, Kalotay Analytics

Tuesday, March 9th @ 11:00-12:30 PM (ONLINE)

Optimal Tax-loss Harvesting of Municipal Bonds

Andrew Kalotay, Kalotay Analytics

ABSTRACT: We will discuss how to quantify the benefit from selling a muni at a loss, and how to determine the optimal time to sell. Calculating the benefit from tax-loss harvesting is more complex for munis than for stocks. Muni prices below par are depressed by the tax cost payable by the marginal buyer. But the ‘hold’ value to the seller depends on the price at which the bond was acquired. Consequently the after-tax proceeds received by the seller may be less than the value of holding. Tax-loss harvesting is an option exercise, and the timing should be based on the tax efficiency measure. The tax option is acquired automatically at the time of purchase. It can be valued using tax-neutral OAS analytics, and should be considered as an integral part of after-tax portfolio value. Sale and reinvestment entails the swapping of tax options.

Slides | Recording