scholarly journals Long-Term Capital Gains Tax Strategies: Correlated Protective Put Strategy

2011 ◽  
Vol 2 (8) ◽  
Author(s):  
John R. Aulerich ◽  
James Molloy
Keyword(s):  
Stock Price ◽  
Capital Gains ◽  
Tax Rates ◽  
Capital Gains Tax ◽  
Tax Rate ◽  
Holding Period ◽  
Put Option ◽  
Highly Correlated ◽  
One Year

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: Times New Roman; font-size: x-small;">A reduction in the long-term capital gains tax rate provides investors with new strategies to minimize taxes and protect investment gains.<span style="mso-spacerun: yes;">&nbsp; </span>One such opportunity exists when an investor decides to sell a profitable stock with a holding period of less than one-year, resulting in short-term ordinary taxes.<span style="mso-spacerun: yes;">&nbsp; </span>The investor would find it more beneficial to sell the stock after one-year lapses, resulting in lower long-term capital gain taxes, although the longer holding period exposes the investor to the uncertainty of stock price movement.<span style="mso-spacerun: yes;">&nbsp; </span>A strategy to extend the holding period without excess risk would be to use the protective put option strategy, sometimes referred to as &ldquo;investment insurance&rdquo;.<span style="mso-spacerun: yes;">&nbsp; </span>The strategy involves the purchase of a put option to protect against the possible decline in the stock price, to take advantage of the lower long-term capital gains tax rate, and to preserve the upside potential of the stock.<span style="mso-spacerun: yes;">&nbsp; </span>Pursuant to IRS Publication 550, the IRS does not allow the use of a protective put to extend the holding period on the same security considered for sale.<span style="mso-spacerun: yes;">&nbsp; </span>Since the IRS does not allow a direct protective put hedge, this study will explore an alternative strategy involving the purchase of a put on a highly correlated investment to extend the holding period to recognize lower capital gains tax rates.<span style="mso-spacerun: yes;">&nbsp; </span>The paper presents example situations when an investor benefits from utilizing the correlated protective put option strategy.</span></p>

The Dividend Clientele Hypothesis: Evidence from the 2003 Tax Act

2014 ◽  
Vol 6 (1) ◽  
pp. 114-136 ◽  
Author(s):  
Laura Kawano
Keyword(s):  
Capital Gains ◽  
Tax Rates ◽  
Capital Gains Tax ◽  
Tax Rate ◽  
Consumer Finances ◽  
Household Portfolio ◽  
Using Data ◽  
The Relationship ◽  
Dividend Tax

This paper provides evidence that dividend and capital gains tax rates importantly influence household portfolio choices. Using data from the Surveys of Consumer Finances around the 2003 dividend tax reductions, I estimate the relationship between taxes and household portfolio dividend yields. I find that a one percentage point decrease in the dividend tax rate relative to the long-term capital gains tax rate causes household portfolio dividend yields to increase by 0.04 percentage points. The results suggest that high income households significantly increased their portfolio dividend yields in response to the 2003 dividend tax rate reductions. (JEL D14, G11, G35, H24)

The Effect of the Expected Holding Period on the Market Reaction to a Decline in the Capital Gains Tax Rate

2002 ◽  
Vol 24 (s-1) ◽  
pp. 49-64 ◽  
Author(s):  
Jia-Wen Liang ◽  
Steven R. Matsunaga ◽  
Dale C. Morse
Keyword(s):  
Market Reaction ◽  
Capital Gains ◽  
Significant Variable ◽  
Tax Rates ◽  
Capital Gains Tax ◽  
Rate Reduction ◽  
Tax Rate ◽  
Holding Period ◽  
Tax Relief ◽  
The Impact

We use the market reaction to capital gains tax rate reduction in the 1997 Tax Relief Act to investigate the market reaction to a change in investor-level tax rates. We find that the positive market reaction was lower for dividend-paying securities and securities with longer expected holding periods. Our results also support the hypothesis that a longer expected holding period reduces the impact of the dividend-paying status. These results are consistent with the tax capitalization model and suggest that the expected holding period is a significant variable in explaining the market reaction to a change in capital gains tax rates.

Capital Gains Taxes and the Market Response to Earnings Announcements

2019 ◽  
Vol 42 (1) ◽  
pp. 1-22
Author(s):  
Greg Clinch ◽  
Bradley P. Lindsey ◽  
William J. Moser ◽  
Mahmoud Odat
Keyword(s):  
Stock Price ◽  
Trading Volume ◽  
Public Information ◽  
Strong Support ◽  
Capital Gains ◽  
Tax Rate ◽  
Price Response ◽  
Capital Gains Taxes ◽  
Public Signal

ABSTRACT We investigate the stock price and trading volume effects of differential capital gains taxes applied to short- and long-term capital gains when firms disclose public information. We extend the theoretical framework developed in Shackelford and Verrecchia (2002) linking differential capital gains taxes to price and volume, allowing for positive and negative news and incorporating exogenous non-taxable, uninformed traders. Our model, like Shackelford and Verrecchia (2002), indicates that price responses to public information are magnified, and volume inhibited, when short-term capital gains attract a higher tax rate than long-term capital gains. However, the effects are more nuanced than those in Shackelford and Verrecchia (2002). Specifically, the degree of magnification/inhibition for price reaction and trading volume differs across well-defined regions of public signal and supply change realizations. We use actual stock price and trading data to empirically investigate these predictions. Our results provide strong support for the price response predictions.

scholarly journals The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates

2021 ◽  
Vol 3 (4) ◽  
pp. 399-416
Author(s):  
Ole Agersnap ◽  
Owen Zidar
Keyword(s):  
Rate Increase ◽  
State Level ◽  
The State ◽  
Capital Gains ◽  
Tax Revenue ◽  
Tax Rates ◽  
Capital Gains Tax ◽  
Tax Rate ◽  
Federal Level ◽  
Long Run

This paper uses a direct-projections approach to estimate the effect of capital gains taxation on realizations at the state level and then develops a framework for determining revenue-maximizing rates at the federal level. We find that the elasticity of revenues with respect to the tax rate over a 10-year period is −0.5 to −0.3, indicating that capital gains tax cuts do not pay for themselves and that a 5 percentage point rate increase would yield $18 to $30 billion in annual federal tax revenue. Our long-run estimates yield revenue-maximizing capital gains tax rates of 38 to 47 percent. (JEL E62, H25, H71)

scholarly journals The Impact of Capital Gains Tax Treatments on Optimal Livestock Enterprise Selection

1980 ◽  
Vol 12 (2) ◽  
pp. 139-145
Author(s):  
John T. Pounder ◽  
Richard A. Schoney ◽  
Gustof A. Peterson
Keyword(s):  
Income Tax ◽  
Capital Gains ◽  
Capital Gains Tax ◽  
Preferential Treatment ◽  
Short Term ◽  
Tax Rate ◽  
Federal Income Tax ◽  
Gains And Losses ◽  
The Impact

Current income tax provisions bear little resemblance to those enacted by the original law, the Revenue Act of 1913. Because of the progressive nature of the federal income tax, a need for special provisions for capital gains was recognized. In 1921, gains from the sale or disposition of capital assets and certain other capital items were identified and taxed differently from income from other sources. The capital gains provisions resulted in the separation of ordinary and capital gains income.Gains and losses from the sale or exchange of a capital asset and other capital items are classified as either short- or long-term, depending on the period of time the property is held. Income from items held for less than the required period is taxed as ordinary income. Income from items held for longer than the required period receive preferential treatment only if the net long-term gain exceeds the net short-term capital loss. If long-term capital gains are realized, 60 percent of the excess gain is claimable as a deduction; the remaining 40 percent of the net gain is taxed at the taxpayer's ordinary tax rate. If the net short-term capital gain exceeds the net long-term loss, 100 percent of the excess is taxable at the normal rate.

Equity Price Pressure from the 1998 Reduction in the Capital Gains Holding Period

2002 ◽  
Vol 24 (s-1) ◽  
pp. 70-93 ◽  
Author(s):  
Jennifer L. Blouin ◽  
Jana Smith Raedy ◽  
Douglas A. Shackelford
Keyword(s):  
Portfolio Management ◽  
Stock Prices ◽  
Stock Price ◽  
Trading Volume ◽  
Capital Gains ◽  
Individual Investors ◽  
Capital Gains Tax ◽  
Marginal Tax Rate ◽  
Holding Period ◽  
Price Pressure

This paper provides evidence consistent with shareholders' personal tax incentives affecting stock prices and trading volume. On June 24, 1998, the marginal tax rate on capital gains was reduced from 28 percent to 20 percent for individual investors holding shares between 12 and 18 months. This study compares firms whose initial public shareholders immediately benefited from the reduction to other IPO firms. The sample of immediately affected firms recorded mean, incremental, one-day stock price declines of −1.3 percent amid heavy trading. The results are consistent with capital gains tax planning constraining investment portfolio management. When the constraint was lifted, enough shareholders sold that prices moved. The results imply that despite increasingly liquid capital markets, transaction costs remain large enough to prevent investors from entering the market immediately and fully offsetting downward price pressure from individual capital gains tax management.

Do Holding Period Tax Incentives Affect Earnings Release Period Selling Activity of Individual Investors?

2004 ◽  
Vol 26 (2) ◽  
pp. 43-64 ◽  
Author(s):  
David N. Hurtt ◽  
Jim A. Seida
Keyword(s):  
Stock Price ◽  
Price Change ◽  
Tax Incentives ◽  
Individual Investors ◽  
Tax Rate ◽  
Holding Period ◽  
The Past ◽  
Time Period ◽  
Selling Decisions

This study examines the effect of tax-rate-based holding period incentives on individual investors' earnings release period selling decisions using selling activity proxies computed from intra-day transaction data. We find evidence that earnings release period selling activity, for a given level of past stock price appreciation (depreciation), is lower (higher) when the magnitude of the tax-rate incentive to hold long term is larger. The results are, however, sensitive to the time period used to compute the past stock price change variable. Although we report results consistent with income tax considerations influencing individual investors' selling decisions, the results cannot be definitively attributed to holding period incentives.

scholarly journals Tax-Motivated Trading by Individual Investors

2005 ◽  
Vol 95 (5) ◽  
pp. 1605-1630 ◽  
Author(s):  
Zoran Ivković ◽  
James Poterba ◽  
Scott Weisbenner
Keyword(s):  
Capital Gains ◽  
Disposition Effect ◽  
Individual Investors ◽  
Tax Rates ◽  
Tax Rate ◽  
Lock In Effect ◽  
Lock In ◽  
Tax Loss ◽  
Statutory Tax Rate

We analyze stock trades made by individuals holding stock in both taxable and tax-deferred accounts. By comparing trades across these two types of accounts, we uncover a capital gains lock-in effect in taxable accounts. The lock-in effect is more pronounced for large stock transactions and for stocks held for at least 12 months. Over shorter horizons, the disposition effect outweighs the lock-in effect. Comparison of loss realizations in taxable and tax-deferred accounts yields evidence of tax-loss selling throughout the year. Effective accrual tax rates for stocks that experience substantial appreciation are substantially below the statutory tax rate on long-term gains.

Sign in / Sign up

Export Citation Format

Share Document