May 11, 2022

Our analysis shows that investors choices are impacted by the tax treatment of the different return delivery mechanisms. That the tax rate differentials distort investment choices and provide incentives for the markets to produce solution that minimize the tax liabilities. The private markets have provided two alternatives. One being the tax loss harvesting TLH strategies as the solution better suited for active strategies. Another being the broad-based ETFs a solution better suited and a less expensive option for passive and or less active investment strategies. Then there are the politically driven solutions such as IRA and Roth IRA. Both IRA versions allow for the tax-free compounding of capital gains. The difference being that for the IRA the income once at redemption and at the beginning for the Roth-IRA. These two vehicles also have advantages over a traditional buy and hold strategy. The reason is simple. To invest into a buy and hold strategy, the income must be earned and taxed as ordinary income. Hence only the after-tax amount is available to invest in the buy and hold strategy and the gains are taxed at redemption. That is the income is taxed twice when earned and at redemption, while for the IRA and Roth-IRA the income is taxed only once.

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