The Impact of Income Tax Withholding Position and Stock Position on the Sale of Stock

Posted: 22 Jun 2007

See all articles by Diana Falsetta

Diana Falsetta

University of Miami - Department of Accounting

Richard A. White

University of South Carolina - Darla Moore School of Business

Abstract

The objective of this study is to investigate the effect that stock position (gain or loss) and income tax withholding position (tax payment or tax refund) have on the sale of stock at the end of the year. Prior investigations of stock position have shown that individuals are more likely to sell gain stocks and hold loss stocks (e.g., the disposition effect). However, studies also have found this pattern of behavior to reverse at year-end in an effort to reduce tax liabilities. We conduct two experiments (baseline and primary) to compare the sell or hold decision of participants with either a gain or loss stock. Results of the baseline experiment confirm the disposition effect. However, when participants become more sensitive to tax considerations, the results of the primary experiment support the tax-loss selling hypothesis. That is, participants tend to sell loss stocks and hold gain stocks. These results, while consistent with the tax-loss selling hypothesis, are contrary to the disposition effect, indicating that these effects are strongest when tax considerations are not a primary factor in the decision process. Furthermore, contrary to expectations, participants are not influenced by income tax withholding position. Their propensity to sell loss stocks relative to gain stocks at year-end is the same whether they are faced with a tax payment or a tax refund.

JEL Classification: H24, M40

Suggested Citation

Falsetta, Diana and White, Richard A., The Impact of Income Tax Withholding Position and Stock Position on the Sale of Stock. Journal of American Taxation Association, Vol. 27, No. 1, 2005, Available at SSRN: https://ssrn.com/abstract=993916

Diana Falsetta (Contact Author)

University of Miami - Department of Accounting ( email )

Coral Gables, FL 33146-6531
United States
305.284.8642 (Phone)
305.284.5737 (Fax)

Richard A. White

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-777-4374 (Phone)
803-777-6876 (Fax)

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