Tax Alpha.......... HIFO

[BaseballRedhawks]

Tax alpha means the value created by effective tax mgmt of investments…
Trying to figure out what exactly the below means..
When tax authorites allow HIFO (highest in, first out) accounting, investors can generate signicant tax savings by first liquidating lots with the highest cost bases.

• If rates are not expected to be constant, however, the value of tax lot accounting can vary. For example: if rates are high and expected to fall (client nearing retirement), it could be beneficial to recognize the tax alpha today.
• If rates expected to rise, it could be beneficial to wait and recognize a significantly larger tax alpha later. It could be beneficial for the investor to liquidate a lower cost basis stock and recognize the capital gain now. This is referred to as LIFO or lowest in/first out accounting.

If tax rates are high and expected to go down….. why is it beneficial to recognize the tax alpha today?
If rates are expected to rise, why isi it beneficial to wait and recognize a signgicantly larger tax alpha later? The text doesnt say if we have unrealized cap gains/losses, but i can’t figure this out!
Thanks!

 

[BaseballRedhawks]

i think i get it……..
Tax Alpha is about saving on taxes… when taxes are already low, you should wait to use it when taxes are high.
When taxes are currently high but going down, you shoul use tax alpha now and not wait.

 

[S2000magician]

Yup.