The Effect of Capital Gains Tax Policy Changes on Long-Term Investments

A reduction in the long-term capital gains tax rate provides investors with new strategies to minimize taxes and protect investment gains.  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.  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.  A strategy to extend the holding period without excess risk would be to use the protective put option strategy, sometimes referred to as “investment insurance”.  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.  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.  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.  The paper presents example situations when an investor benefits from utilizing the correlated protective put option strategy.

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The effect of capital gains tax policy on investment company capital gains realizations

Advances in Taxation ◽

10.1016/s1058-7497(02)14013-0 ◽

2004 ◽

pp. 245-270

Author(s):

Claire Y. Nash ◽

W.Mark Wilder ◽

Morris H. Stocks

Keyword(s):

Tax Policy ◽

Capital Gains ◽

Capital Gains Tax ◽

Investment Company

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Taxation, Dividends, and Share Repurchases: Taking Evidence Global

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109013000367 ◽

2013 ◽

Vol 48 (4) ◽

pp. 1241-1269 ◽

Cited By ~ 44

Author(s):

Marcus Jacob ◽

Martin Jacob

Keyword(s):

Capital Gains ◽

Event Studies ◽

Share Repurchases ◽

Capital Gains Tax ◽

Single Event ◽

Coefficient Estimates ◽

Data Set ◽

Propensity To Pay ◽

Robust Evidence

AbstractWe compile a comprehensive international dividend and capital gains tax data set to study tax-based explanations of corporate payout for a panel of 6,035 firms from 25 countries for the period 1990–2008. We find robust evidence that the tax penalty on dividends versus capital gains corresponds closely with firms’ propensity to pay dividends and repurchase shares, and with the amount of dividends and shares repurchased. Our coefficient estimates suggest a smaller tax effect than reported in recent single-country, single-event studies. Instead, our results correspond more closely with historic long-term estimates of the elasticity of dividends.

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Optimal Tax Timing with Asymmetric Long-Term/Short-Term Capital Gains Tax

Review of Financial Studies ◽

10.1093/rfs/hhv024 ◽

2015 ◽

Vol 28 (9) ◽

pp. 2687-2721 ◽

Cited By ~ 11

Author(s):

Min Dai ◽

Hong Liu ◽

Chen Yang ◽

Yifei Zhong

Keyword(s):

Capital Gains ◽

Capital Gains Tax ◽

Short Term ◽

Optimal Tax

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

Journal of Agricultural and Applied Economics ◽

10.1017/s0081305200015740 ◽

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.

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Capital Gains Tax in Theory and Practice

VISION Journal of Indian Taxation ◽

10.17492/vision.v1i1.2417 ◽

2014 ◽

Vol 1 (1) ◽

Author(s):

S. M. Jawed Akhtar

Keyword(s):

Real Estate ◽

Income Tax ◽

Market Value ◽

Capital Gains ◽

Theory And Practice ◽

Present System ◽

Capital Gains Tax ◽

Preferential Treatment ◽

Theoretical Issues

Capital gains arise from the sale of assets other than those held in the ordinary conduct of business. For example, gains from the sale of a house by the house owner are capital gains while gains from appreciation in the value of houses held by a real estate dealer are ordinary gains of business. A decrease in the value of an asset is called a capital loss. In India, capital gains tax is levied within the framework of Indian Income Tax Act, 1961. Sections 45 to 55A of the Act relate to the taxation of capital gains. Since capital gains are not annual accruals from a given source but represent appreciation in the market value of assets over a period of time, they are treated on a different footing. The preferential treatment is given to long-term capital gains only. This paper examines the various theoretical issues associated with the taxation of capital gains and the present system of taxing capital gains in India.

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Congress Finally Passes Carried Interest Legislation, But is it Enough?

The ATA Journal of Legal Tax Research ◽

10.2308/jltr-52586 ◽

2019 ◽

Vol 17 (1) ◽

pp. 9-24

Author(s):

Hughlene A. Burton ◽

Noel Brock

Keyword(s):

Tax Policy ◽

Capital Gains ◽

Capital Gain ◽

Short Term ◽

Minimal Impact ◽

Self Employment ◽

Interest Income ◽

Jobs Act ◽

Unlimited Amount

ABSTRACT After numerous failed previous attempts to enact legislation taxing “carried interest” income attributable to services as compensation income versus capital gains, Congress enacted Section 1061 as part of the Tax Cuts and Jobs Act. Unlike previous proposals, which would tax carried interest income attributable to services as compensation income, Section 1061 simply reclassifies some carried interest income attributable to services as short-term capital gain. By choosing to treat carried interest income attributable to services as short-term capital gain instead of as compensation income, Section 1061 exempts such income from self-employment tax and allows taxpayers to offset such income with an unlimited amount of short-term capital losses. This paper reviews the requirements under Section 1061 and explains several ambiguities created by the new law. In addition, this paper examines whether Section 1061 follows sound tax policy. The authors find that Section 1061 does not follow the tax policy concepts of equity and fairness, economic efficiency, neutrality, simplicity, or certainty. In addition, the authors find that Section 1061 will have minimal impact, as most carried interest is held longer than the required period to qualify as long-term capital gain.

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