Tax question available, beginning, question, accounts

tarunajwani

A client has $100 in a taxable account and $100 in a Tax Deferred Account. Both accounts incurred losses at the end of the year. Tax harvesting is available. Had the investor placed more money in the taxable account from the beginning, would the volatility of the returns had increased or decreased? Also, would the after tax returns be higher or lower?

noel

Someone should email them and challenge this question

amqata

The original poster forgot to mention that the question was about ‘that year’.
Now, if both accounts were 100 at the beginning and lost 20%, ending value is 80. Neither pay taxes and since we are interested in ‘that year’ only (not future tax harvesting benefits), the return was equal -20% for both.
I believe the same should apply to volatility ‘that year’. If your accounts go down 20%, they go down 20% and have thus the same volatility. Of course one could invent assumptions on what would have happened if we had measured volatility based on monthly values during ‘that year’. In that case, one month’s loss would have decreased tax liability the next month and sigma(1-t) would have applied. But now we only had one year and one observation.

ShooterMcCFA

passme wrote:
^I did what Zerobonus did, but after the exam, I rethought the question and realized there weren’t any gains.
when government\s share of taxes lowers portfolio’s volatility, it lowers both losses and gains.
in this case, portfolio had loss, so the loss is lowered in taxable account.


A lower loss = higher return
-5% return is higher than -10% return, no?

Wendy01

^I did what Zerobonus did, but after the exam, I rethought the question and realized there weren’t any gains.
when government\s share of taxes lowers portfolio’s volatility, it lowers both losses and gains.
in this case, portfolio had loss, so the loss is lowered in taxable account.

towardsutopia21

Return increases and volatility down
with taxable account gov’t shares part of the risk

Zestt

Can you not use the capital losses to offset the income gains? Or is it soley capital gains that can have losses applied to them?

thecfawannabe

Can you not use the capital losses to offset the income gains? Or is it soley capital gains that can have losses applied to them?

Iginla2010

I think you did right.

bchadwick

^I dont get what you mean by that.
Honestly, I’m not sure that I’m right. I just think that I’m better off not making assumptions like the above. Even though I thought the same thing.