Can someone help explain Tax Alpha to me.

[kh.asif]

I understand the basic stuff. That is if I have an unrealized loss on an Asset I can use that to reduce my tax burden. However after that the text goes on to talk about investing the tax savings and I get lost from there onwards. Help would be appreciated.

 

[sk22]

kh.asif Wrote:
——————————————————-
> I understand the basic stuff. That is if I have an
> unrealized loss on an Asset I can use that to
> reduce my tax burden. However after that the text
> goes on to talk about investing the tax savings
> and I get lost from there onwards. Help would be
> appreciated.
think in terms of postponing the tax payment.
If you were to pay now you would have to realise the tax and remove N*Tax from your portfolio/account now. But by deferring the tax payment you have the ability to invest the full portfolio including the N*Tax.
At a later date when the deferred tax is due, that N*Tax which you were able to invest for the period is now worth (1+r)(N*Tax)…. you pay N*Tax and you are left with r(N*Tax) which is your tax alpha.

 

[kh.asif]

Thanks. Makes sense. Let me make some conclusions based on what you said
1. The tax alpha=return*(N*Tax) and not N*tax.
2. There is no tax alpha if I do not invest the tax savings
amidoinitrite?