Break-Even Point Between Short-Termand Long-Term Capital Gain (Loss) Strategies

Abstract

A loss sale of stock allows investors to take a capital loss deduction. However, it has always been unclear whether it is advisable for individual investors to engage in loss sales of stock to take advantage of the tax benefit. Indeed, determining at what point the investment becomes indifferent as it relates to short-term and long-term capital gains (losses) is the focus of this article. The authors use three important variables to develop a model to help investors reach a conclusion regarding the loss sale quandary: tax rate, life of investment, and capital-gain (loss) growth rate. The break-even equation used in this research identifies the relationship among these variables, and the resulting model enables investors to make an optimum choice between short-term and long-term investment strategies. Ultimately, the model shows that a short-term investment strategy is more preferable for a longer-life investment, with a lower short-term capital gain tax rate, and a higher capital-gain growth rate. In contrast, a long-term investment would favor a shorter-life investment, with a higher short-term capital-gain tax rate, and lower capital-gain growth rate. The article also applies the model to the current stock market downturn and sudden climb.