Working Paper: NBER ID: w10275
Authors: Zoran Ivkovi; James Poterba; Scott Weisbenner
Abstract: We use data on the stock trades of a large number of individual investors to study how tax incentives affect the realization of capital gains and losses. We compare investors' realizations in their taxable and tax-deferred accounts, which allows us to identify tax-motivated trading. We reach three conclusions. First, we find a strong lock-in effect for capital gains in taxable accounts relative to tax-deferred accounts. The capital gains lock-in effect is stronger for large than for small transactions, and it intensifies at longer holding periods. Second, we find tax-loss selling throughout the calendar year, though it is most pronounced in December, particularly if the investor has realized capital gains elsewhere in the portfolio during the year. Third, we observe substantial heterogeneity in individual investors' propensity to trade. Controlling for this heterogeneity, however, does not alter the relationship between a stock's past performance and the realization decision.
Keywords: taxation; capital gains; individual investors; trading behavior
JEL Codes: H24; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax considerations (H24) | lock-in effect for capital gains in taxable accounts (F38) |
| lock-in effect for capital gains in taxable accounts (F38) | less likely to sell appreciated stocks in taxable accounts (D14) |
| 25% capital gain (G11) | 22% increase in the monthly hazard rate of selling in taxable accounts during the first six months (C41) |
| 25% capital gain (G11) | 6% reduction in selling probabilities after one year (G17) |
| tax-loss selling throughout the year (G14) | increase in selling probability when investors have realized gains elsewhere in their portfolio (G11) |
| 25% loss (G33) | 11% increase in monthly realization probability in taxable accounts outside December (G19) |
| 25% loss (G33) | 81% increase in monthly realization probability in taxable accounts in December (G19) |
| wash sale restrictions (F38) | significantly lower probability of repurchasing a stock sold at a loss in December (G14) |