Tax-timing option

Tax-timing option

The option to sell an asset and claim a loss for tax purposes or not sell the asset and defer the capital gains tax.

Tax-Timing Option

An option every investor has to either sell an asset for a loss and thereby reduce one's tax liability or continue to hold it and maintain the possibility that one may eventually sell it for a gain.
References in periodicals archive ?
The tax-timing option for any security is implicit as investors benefit from the flexibility of recognizing losses and deferring gains.
As with standard options, the tax-timing option of any security increases in value with underlying security volatility.
The tax-timing option value, ignoring all transaction costs and market imperfections, is:
Since the term in brackets cannot exceed one when [micro] is positive, the value of the tax-timing option is at most [tau] percent of the company's market value.
This tax-timing option is valuable to an issuing firm that is in a low tax bracket when it raises capital but may face higher tax rates in the future.
The issuing firm gives up a valuable tax-timing option if it issues non-exchangeable convertible preferred.
This tax-timing option is valuable to an issuing firm that currently is in a low tax bracket but could face higher tax rates in the future.
Therefore, the value to the issuer of the tax-timing option exceeds the potential cost that it imposes on the investor.
However, the issuing firm still gives up a valuable tax-timing option.
Constantinides (1983, 1984) and Constantinides and Ingersoll (1984) show that the ability of investors to realize tax credits on capital losses, and to defer taxes on capital gains, conveys to them a valuable tax-timing option that can contribute significantly to the value of a position in a security.
Standard results from option pricing indicate that the firm can maximize investor tax-timing option value by choosing the long-term debt maturity strategy.
In this paper, we first set up a model that isolates the effect of debt maturity structure on investor tax-timing option value.