Diversification and the Taxation of Capital Gains and Losses

28 Pages Posted: 2 May 2003

See all articles by Richard J. Rendleman

Richard J. Rendleman

University of North Carolina at Chapel Hill

Douglas A. Shackelford

University of North Carolina Kenan-Flagler Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2003

Abstract

Current U.S. law nets the total portfolio of realized capital gains and losses to compute capital gains taxes. Prior research, however, typically ignores the implication of this provision, i.e., the marginal tax rate for a specific gain or loss depends on the taxpayer's total portfolio of realized gains and losses. We find that these nettings introduce complexity into the relation between share values and capital gains taxes, creating an incentive to diversify. For firms with stock returns that are positively (negatively) correlated with those of the overall market, share values generally are decreasing (increasing) in the capital gains tax rate.

Keywords: capital gains taxes, diversification, stock returns

JEL Classification: H24, G11, G12, G13

Suggested Citation

Rendleman, Richard J. and Shackelford, Douglas A., Diversification and the Taxation of Capital Gains and Losses (April 2003). Available at SSRN: https://ssrn.com/abstract=396043 or http://dx.doi.org/10.2139/ssrn.396043

Richard J. Rendleman

University of North Carolina at Chapel Hill ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-3188 (Phone)
919-962-0054 (Fax)

Douglas A. Shackelford (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-3197 (Phone)
919-962-4727 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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