<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;"> </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;"> </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;"> </span>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”.<span style="mso-spacerun: yes;"> </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;"> </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;"> </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;"> </span>The paper presents example situations when an investor benefits from utilizing the correlated protective put option strategy.</span></p>
Treasury Bill Yield Reactions to the 1997 Capital Gains Tax Rate Reduction