Capital Gains Taxes and the Realization of Capital Gains and Losses - Evidence from German Income Tax Data

Abstract

This paper analyzes the impact of capital gains taxation on the decision to realize capital gains and losses when gains are tax-exempt after a certain holding period. Theory predicts that high marginal tax rates incentivize investors to realize taxable losses. In contrast, the propensity to realize taxable short-term capital gains decreases in the marginal tax rate. Using two stratified 10% random samples of all German income tax declarations filed in 2001 and 2004, the paper provides robust evidence for this prediction. The marginal tax rate has a significant and positive (negative) impact on the investor's propensity to realize capital losses (gains).

Keywords: Capital Gains Tax, Capital Losses, Income Tax, Investment Decisions, Lock-In Effect, Speculation Gains, Tax Clienteles

JEL Classification: H21, H24, H25