What is tax arbitrage in investing?


Tax arbitrage in investing refers to strategies that capitalize on the differences in tax rates or benefits within different financial situations to reduce overall tax liability. According to , one form of tax arbitrage is tax loss harvesting, where investors sell off investments at a loss to offset capital gains or even ordinary income. This can be used to write off up to $3,000 a year against ordinary income. Furthermore, Big ERN discusses the strategy of deferring taxes by selling shares with the highest cost basis and the lowest tax bill, which can also be seen as a form of tax arbitrage aimed at paying taxes later rather than sooner, leveraging the time value of money. Additionally, there's an element of tax planning for inheritance where shares with the highest capital gains are left to heirs, allowing them to reset the cost basis upon inheritance, effectively reducing the capital gains tax the heirs would have had to pay 1.

Tax Arbitrage

Big ERN discusses tax loss harvesting and deferring taxes for as long as possible by selling shares with the highest cost basis and lowest tax bill. He also shares a tax hack for leaving taxable accounts to heirs.


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