Optimal Tax-Timing with Asymmetric Long-Term/Short-Term Capital Gains Tax

Forthcoming: Review of Financial Studies

50 Pages Posted: 15 Mar 2011 Last revised: 21 Mar 2015

See all articles by Min Dai

Min Dai

National University of Singapore (NUS) - Department of Mathematics

Hong Liu

Washington University in St. Louis - Olin Business School; Fudan University - China Institute of Economics and Finance

Yang Chen

National University of Singapore (NUS) - Department of Mathematics

Yifei Zhong

University of Oxford - Mathematical Institute; University of Oxford - Mathematical Institute

Date Written: March 17, 2015

Abstract

We develop an optimal tax timing model that takes into account asymmetric long-term and short-term tax rates for positive capital gains and limited tax deductibility of capital losses. In contrast to the existing literature, this model can help explain why many investors not only defer short-term capital losses to long term but also defer large long-term capital gains and losses. Because the benefit of tax deductibility of capital losses increases with the short-term tax rates, effective tax rates can decrease as short-term capital gains tax rates increase.

Keywords: Capital Gains Tax, Tax Timing, Portfolio Selection, Asymmetric Tax Rates

JEL Classification: G11, H24, K34, D91.

Suggested Citation

Dai, Min and Liu, Hong and Chen, Yang and Zhong, Yifei, Optimal Tax-Timing with Asymmetric Long-Term/Short-Term Capital Gains Tax (March 17, 2015). Forthcoming: Review of Financial Studies . Available at SSRN: https://ssrn.com/abstract=1786012 or http://dx.doi.org/10.2139/ssrn.1786012

Min Dai

National University of Singapore (NUS) - Department of Mathematics ( email )

Singapore

Hong Liu (Contact Author)

Washington University in St. Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-5883 (Phone)

Fudan University - China Institute of Economics and Finance ( email )

China

Yang Chen

National University of Singapore (NUS) - Department of Mathematics ( email )

Department of Mathematics
Singapore, 117543
Singapore

Yifei Zhong

University of Oxford - Mathematical Institute ( email )

Mathematical Institute
24-29 St Giles
Oxford, Oxfordshire OX1 3LB
United Kingdom

University of Oxford - Mathematical Institute ( email )

24-29 St Giles'
Oxford, OX1 3LB
United Kingdom

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