TY - JOUR T1 - The Tax Benefits of Direct Indexing: Not a One-Size-Fits-All Formula JF - The Journal of Beta Investment Strategies DO - 10.3905/jbis.2022.1.001 SP - jbis.2022.1.001 AU - Nathan Sosner AU - Michael Gromis AU - Stanley Krasner Y1 - 2022/03/15 UR - https://pm-research.com/content/early/2022/03/15/jbis.2022.1.001.abstract N2 - Direct-indexing strategies realize tax benefits by harvesting losses on individual stock positions. Some investors might benefit from this powerful tool for growing after-tax wealth significantly more than others. An important determinant of the tax benefits of direct-indexing strategies is the tax rates applicable to gains from other investments. We argue that high-net-worth investors with allocations to hedge funds and derivatives are the most likely investors to have systematic short-term capital gains and, therefore, derive the highest tax benefits from direct-indexing strategies. We use a long history of U.S. stock returns to estimate the level of tax benefits offered by direct-indexing strategies under different tax rate assumptions. We show that investors, even those without short-term capital gains in their portfolios, can significantly increase the tax benefits of direct indexing by regular capital contributions and charitable giving of appreciated stocks. A character-deferral decomposition of the tax benefits helps explain what drives this result. ER -