The main benefit of tax-loss harvesting is: A) saving on current taxes. B) saving on future taxes. C) reducing both current and future taxes. Please explain why. tks.
A. There is a very good explanation in a blue box in the CFAI text
I read the paragraphs before and after, and now understand. Anyway, here is the original explanation: Although tax loss harvesting saves on current taxes, the apparent tax savings in a given year are misleading. This is because when the security is sold and the proceeds are reinvested, the cost basis of the new, replacement security is the low sales price of the old security. In other words, when the old security is sold, the cost basis for future taxes is reduced, thereby resulting in higher taxes in the future.
A. The cumulative tax alpha from harvesting increases over time but is greatest in the early years. This results mostly from reinvesting the tax savings of the current year, increasing the after tax money available for investment.