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Making the most of one's financial portfolio is at the core of personal finance, but even the most experienced investors can get lost trying to keep their goals and investments aligned. We've had many investors ask for help understanding when best to make realizations, and the end results is Elm's Early Realization Calculator.
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When capital gains rates are expected to go up, is it better to realize gains and pay tax now, or defer and pay tax at a higher rate in the future? The answer depends on many variables, with horizon often being the most critical. This calculator jointly solves for the amount of gain to realize today, and the allocation to the risky asset going forward, which maximize the investor’s risk-adjusted wealth. Please don’t hesitate to be in touch with any questions or suggestions.
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Expected Wealth Gain to Horizon (Risk-Adjusted):
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GLOSSARY
Time horizon in years.
The value of current unrealized capital gain as a percentage of total portfolio value.
The risk-free (or minimum-risk) nominal interest rate.
The long-term capital gains rate prevailing today.
Annual expected nominal return on the risky asset to the specified Horizon.
The tax rate expected in the future for long-term capital gains.
Annual standard deviation of risky asset returns.
The probability at the Horizon that the risky asset will be realized in a taxable manner (e.g. sold instead of bequested or inherited).
The risk-aversion coefficient given CRRA utility (2 to 3 is a reasonable range).
The tax rate on dividends.
The risky asset's current dividend yield (annual).
The tax rate on interest.
The percentage of the total portfolio held in the risky asset.
The extent to which a realized loss creates a tax asset for a very short Horizon. 0 = no asset value, 1 = asset valued at 100% gain offset.
The period over which the realized loss value linearly decays from its starting value to zero.
