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Diversification and the Taxation of Capital Gains and Losses

Author

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  • Richard J. Rendleman, Jr.
  • Douglas A. Shackelford

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.

Suggested Citation

  • Richard J. Rendleman, Jr. & Douglas A. Shackelford, 2003. "Diversification and the Taxation of Capital Gains and Losses," NBER Working Papers 9674, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:9674
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    Cited by:

    1. Sahm, Marco, 2006. "Essays in Public Economic Theory," Munich Dissertations in Economics 5633, University of Munich, Department of Economics.
    2. Ali Akbar Gholizadeh, 2014. "Capital Gains Tax and Housing Price Bubble: A Cross-Country Study," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 18(2), pages 47-71, Spring.

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    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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