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Capital Gains Tax Rules, Tax‐loss Trading, and Turn‐of‐the‐year Returns
Author(s) -
Poterba James M.,
Weisbenner Scott J.
Publication year - 2001
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00328
Subject(s) - taxable income , capital gains tax , incentive , monetary economics , tax credit , economics , tax reform , ad valorem tax , capital (architecture) , deferred tax , business , state income tax , public economics , microeconomics , accounting , gross income , archaeology , history
Changes in the capital gains tax rules facing individual investors do not affect the incentives for “window dressing” by institutional investors, but they can affect the incentives for year‐end tax–induced trading by individual investors. Empirical evidence for the 1963 to 1996 period suggests that when the tax law encouraged taxable investors who accrued losses early in the year to realize their losses before year‐end, the correlation between early year losses and turn‐of‐the‐year returns was weaker than when the law did not provide such an early realization incentive. These findings suggest that tax‐loss trading contributes to turn‐of‐the‐year return patterns.