Tax-loss Harvesting Municipal Bonds: A Primer

Andy Kalotay

Research

9 Pages

This paper examines why tax loss harvesting in municipal bonds is more complicated than simply selling positions with losses. Tax savings can be offset by valuation effects and transaction costs, meaning some seemingly attractive sales may destroy value. High premium bonds may offer better harvesting opportunities than near par bonds.

Key Takeaways

Savings Can Mislead: A bond sold at 90.40 generated 1.92 points of tax savings, yet its 92.96 hold value exceeded 92.32 in after tax proceeds.
Trading Costs Matter: Muni transactions can cost 0.5 to 0.75 points each way, requiring a loss exceeding 5 points to offset a 1 point round trip cost at a 20% tax rate.
Tax Rates Diverge: Long term losses can be written off at 20%, while short term losses receive a higher 40% rate, increasing their potential harvesting value.
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