Hypothetical tax alpha

We used the following formula to calculate the hypothetical tax alpha information in our chart:

Tax alpha = (Short term net realized losses x Short term tax rate) + (Long term net realized losses x Long term tax rate) / Average portfolio value

We used the following assumptions:

  • We have assumed that every quarter during the backtesting period, the portfolio was rebalanced, and stocks with any losses since the prior quarter were replaced with stocks that had similar expected risk and return characteristics at the time of rebalancing while trying to maintain the target capitalization weighting.
  • At the end of each calendar year, we calculated the total net losses (short-term and long-term) and the tax alpha using the formula above. We have assumed a federal long-term capital gain tax rate of 20% and a federal short-term capital gain tax rate of 40%, and assumed losses were fully utilized against similar type of gains. These federal tax rates typically apply to individuals in the highest income tax brackets. Please note that the applicable federal tax rates may have been different than these assumed rates during the backtesting period. This calculation did not take into account the federal surcharge of 3.8% applicable to net investment income or any state taxes. Therefore, any tax alpha that may have been contemporaneously achieved during the backtesting period may have been different than these hypothetical figures. (Please review IRS Topic 409 for additional information on the tax rate that would apply to your investments in this portfolio based on your particular circumstances.)
  • We did not assume reinvestment of tax savings and did not factor in the effect of losing qualified dividend treatment. We have calculated average portfolio values by calculating the average of the portfolio valuation at each quarter end.

Please note that:

  • These tax alpha results are hypothetical only and were obtained through the retroactive application of a model designed with the benefit of hindsight. They were generated using a specific set of processes, data sources and assumptions, are not based on the trading of any actual client or IB Asset Management account, and did not take into account whether any specific client would have been able to successfully harvest these losses. Changing any of the assumptions, processes, data sources and conditions used could have resulted in different tax alpha results. These hypothetical tax alpha results are provided for informational and educational purposes only and are not intended as tax advice. They are intended to illustrate the potential benefits of using the tax-loss harvesting strategy of this portfolio over a long investment period and assume that the client remained invested during the entire time period. These hypothetical tax alpha results do not reflect actual trading or the effect of economic and market factors on the decision-making process. IB Asset Management does not represent that these tax alpha results will be achieved or sustained. Actual results will vary. Actual tax alpha generated by investing in this portfolio may differ significantly from these hypothetical backtested figures.
  • Clients should not rely on these hypothetical results to predict the tax alpha that investing in this portfolio may generate in the future. Clients should consult a tax adviser on the tax consequences of investing in this portfolio based on their particular circumstances.
  • Whenever the tax alpha was 0% in a given year, there is no bar corresponding to that year (e.g., 2006, 2010, 2012, 2013, 2014).