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

Min Dai; Hong Liu; Chen Yang; Yifei Zhong

doi:10.1093/rfs/hhv024

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

Min Dai¹; Hong Liu²; Chen Yang³; Yifei Zhong^4,5

¹ Department of Mathematics and Risk Management Institute, NUS · ² Washington University in St. Louis · ³ National University System · ⁴ University of Oxford · ⁵ Mathematical Institute of the Slovak Academy of Sciences

Review of Financial Studies 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.

DOI: 10.1093/rfs/hhv024
Volume: 28 (9)
Pages: 2687-2721
Language: en
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