Optimal Tax-Timing and Asset Allocation when Tax Rebates on Capital Losses are Limited
Copenhagen Business School
March 23, 2012
Journal of Banking and Finance, Vol. 36, Issue 7, 2048-2063
This article studies the portfolio problem with realization-based capital gain taxation when limited amounts of losses qualify for tax rebate payments as under current U.S.\ tax law. As the tax rate applicable to realized losses exceeds that on realized capital gains, it can be optimal to realize capital gains immediately and pay capital gain taxes to regain the option of using potential future losses against a higher tax rate. This incentive adds an entirely new and so far unstudied dimension to the portfolio problem. We show that it affects the distribution of public capital gain tax revenues and can explain the low empirically observed equity holding period.
Number of Pages in PDF File: 39
Keywords: asset allocation, portfolio choice, tax-timing, tax loss carry-forward
JEL Classification: G11, H24Accepted Paper Series
Date posted: July 7, 2007 ; Last revised: May 13, 2012
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