PODCAST:Masters in Business
TITLE:At the Money: How to Pay Less Capital Gains Taxes
DATE:2024-01-24 00:00:00
URL:
MODEL:gpt-4-gizmo
The "Masters in Business" podcast episode titled "At the Money: How to Pay Less Capital Gains Taxes," hosted by Barry Ritholtz and aired on January 24, 2024, delves into the concept of tax-lost harvesting through direct indexing. The episode features Ari Rosenbaum from O'Shaughnessy Asset Management, a division of Franklin Templeton, and discusses strategies for maximizing net after-tax equity returns from non-tax-exempt portfolios.
The podcast begins with Ritholtz disclosing his firm's usage of O'Shaughnessy's direct indexing product, Canvas, and its significant investment in it. The focus then shifts to tax-lost harvesting in mutual funds and ETFs, explaining how losses are captured by selling poorly performing funds and replacing them with similar ones. Rosenbaum notes the challenge with this approach is that markets often go up, limiting opportunities for harvesting losses in these funds.
Rosenbaum then explains direct indexing, which offers the same professional oversight and diversification as mutual funds or ETFs but with access to individual securities trading at different prices. This method allows investors to own a significant portion of an index, such as the S&P 500 or Vanguard Total Market, but not all constituents due to their minor impact on returns. Direct indexing enables the harvesting of losses from individual stocks within the index, even when the index as a whole is up, thus offsetting gains over time.
When selling individual companies in direct indexing, they're replaced with stocks having similar characteristics, maintaining the underlying investment strategy. Research suggests that using direct indexing for tax loss harvesting can yield 50 to 100 basis points over a full market cycle, compared to 20-25 basis points with mutual funds or ETFs.
The podcast also discusses a case study of an investor with a concentrated position in a public company. Through direct indexing, the investor was able to diversify and manage taxable exit more efficiently, reducing their position significantly within a year without incurring large tax bills. This approach is entirely legal and approved by the IRS.
Ritholtz and Rosenbaum discuss the cost-effectiveness of direct indexing, highlighting the significantly reduced trading costs and average client fees. They clarify that direct indexing is accessible with a minimum investment of $250,000, making it available to a broader range of investors, not just the ultra-wealthy.
The episode concludes by emphasizing the importance of net after-tax returns for investors, especially those with large capital gains from various sources. Direct indexing is presented as a viable method to maximize gains after taxes. The podcast aims to inform investors about this sophisticated tax management strategy, underscoring its accessibility and potential benefits in reducing tax liabilities.
