This article explores the optimal trading and pricing of taxable securities with asymmetric capital gains taxes and transaction costs. In the long-term region, investors realize all gains below some critical cutoff level, which we derive analytically. In the short-term region, investors defer all gains and, depending upon the time remaining in the short-term region, may also defer small losses. Contrary to common intuition, deferral of short-term losses can be optimal even without transaction costs. The value of tax timing is considerably bigger under the optimal trading strategy than under alternative strategies previously analyzed. The impact of offset rules is also explored. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
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Article provided by Oxford University Press for Society for Financial Studies in its journal Review of Financial Studies.
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