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
Date Written: March 17, 2015
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: Suggested Citation