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

Author

Listed:
  • Min Dai
  • Hong Liu
  • Chen Yang
  • Yifei Zhong

Abstract

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.

Suggested Citation

  • Min Dai & Hong Liu & Chen Yang & Yifei Zhong, 2015. "Optimal Tax Timing with Asymmetric Long-Term/Short-Term Capital Gains Tax," The Review of Financial Studies, Society for Financial Studies, vol. 28(9), pages 2687-2721.
    • Handle: RePEc:oup:rfinst:v:28:y:2015:i:9:p:2687-2721.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhv024
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    Citations

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    Cited by:

    1. Paul Ehling & Michael Gallmeyer & Sanjay Srivastava & Stathis Tompaidis & Chunyu Yang, 2018. "Portfolio Tax Trading with Carryover Losses," Management Science, INFORMS, vol. 64(9), pages 4156-4176, September.
    2. Yaoting Lei & Ya Li & Jing Xu, 2020. "Two Birds, One Stone: Joint Timing of Returns and Capital Gains Taxes," Management Science, INFORMS, vol. 66(2), pages 823-843, February.
    3. Nabeel Butt, 2019. "On Discrete Probability Approximations for Transaction Cost Problems," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 26(3), pages 365-389, September.
    4. Jiatu Cai & Xinfu Chen & Min Dai, 2018. "Portfolio Selection with Capital Gains Tax, Recursive Utility, and Regime Switching," Management Science, INFORMS, vol. 64(5), pages 2308-2324, May.
    5. Shan Huang, 2019. "Taxable Stock Trading with Deep Reinforcement Learning," Papers 1907.12093, arXiv.org, revised Jul 2019.

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