Capital Gains Taxes and Trading Incentives

55 Pages Posted: 10 Jan 2020 Last revised: 11 Jan 2024

See all articles by Mattia Landoni

Mattia Landoni

Federal Reserve Banks - Federal Reserve Bank of Boston

Date Written: July 2023

Abstract

Deferring the realization of gains is generally tax-efficient for stocks, but not for other important asset classes including taxable bonds and noncorporate business assets. These assets make up roughly half of all capital gains-producing financial assets held by households. I develop a simple framework that provides intuition on when tax deferral is advantageous. When it is advantageous, the strength of the resulting lock-in effect should vary predictably across asset classes. I verify this prediction by showing that property-casualty insurers are more reluctant to realize gains on tax-exempt bonds than on taxable bonds. My findings have important implications for portfolio optimization and for ongoing tax policy debates on entrepreneurship incentives, distortions, revenue, and optimal taxation.

Keywords: capital gains, taxes, tax deferral, lock-in effect, trading

JEL Classification: H24, H21, G11, G12, G22

Suggested Citation

Landoni, Mattia, Capital Gains Taxes and Trading Incentives (July 2023). Available at SSRN: https://ssrn.com/abstract=3507823 or http://dx.doi.org/10.2139/ssrn.3507823

Mattia Landoni (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
69
Abstract Views
821
Rank
598,765
PlumX Metrics