Volume 14, Number 1, 2016
As currently practiced, tax-loss selling of municipal bonds is typically an ad hoc year-end exercise. Under dynamic tax management the right to execute a tax-beneficial trade is considered to be a valuable option. Selling a bond and reinvesting in another entails swapping the associated tax options. The generalized tax efficiency measure signals the optimum time to transact. Long-duration bonds trading at a premium are best poised to achieve superior performance; bonds purchased below par are unsuitable for tax management. The incremental return from dynamic management is significant, particularly when short-term gains are available to offset short-term losses.