@article {Anderson52, author = {Stephen W. Anderson and Iraklis Kourtidis}, title = {Direct Indexing with Tax-Loss Harvesting: The Importance of Held-Away Gains}, volume = {13}, number = {2}, pages = {52--61}, year = {2022}, doi = {10.3905/jbis.2022.1.005}, publisher = {Institutional Investor Journals Umbrella}, abstract = {Direct indexing (DI) combined with tax-loss harvesting (TLH) is a popular approach to generate capital losses to offset a client{\textquoteright}s capital gains, while attempting to track a specified index. To quantify the tax alpha of DI/TLH, we must make assumptions about the amount of client capital gains that can be offset. The most common simplifying assumption is that the client has unlimited long-term (LT) gains to be offset and either unlimited (or perhaps zero) short-term (ST) gains. We relax these assumptions by using a schedule of expected yearly LT and ST {\textquotedblleft}held-away{\textquotedblright} net gains. We show that as yearly expected gains decrease, the effectiveness of DI/TLH also decreases. Instead of fully offsetting capital gains, some TLH capital losses become carryover losses. These are still valuable, but delay the conversion of capital losses into a tax benefit. We quantify this effect using our tax-aware backtester.}, issn = {2771-6511}, URL = {https://jii.pm-research.com/content/13/2/52}, eprint = {https://jii.pm-research.com/content/13/2/52.full.pdf}, journal = {The Journal of Beta Investment Strategies} }