Optimal Stock Trading with Personal Taxes: Implications for Prices and the Abnormal January Returns

George M. Constantinides

NBER Working Paper No. 1176 (Also Reprint No. r0507)
Issued in August 1983
NBER Program(s):Monetary Economics, Public Economics

The tax law confers upon the investor a timing option--to realize capital losses and defer capital gains. With the tax rate on long term capital gains and losses being about half the short term rate, the tax law provides a second timing option--to realize capital losses short term and realize capital gains long term, if at all. Our theory and simulation with actual stock prices over the 1962-1977 period establish that the second timing option is extremely valuable: Taxable investors should realize their long term capital gains in high variance stocks and repurchase the same or similar stock, in order to reestablish the short-term status and realize potential future losses short term.Tax trading does not explain the positive abnormal returns of small firms. In the presence of transactions costs, tax trading predicts that the volumeof tax-loss selling increases from January to December and ceases inthe first few days of January. The trading volume seasonal maps into a stockprice seasonal only if tax-loss sellers are assumed irrational or ignorant of the price seasonality.

download in pdf format
   (547 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w1176

Published: Constantinides, George M. "Optimal Stock Trading with Personal Taxes: Implications for Prices and the Abnormal January Returns." Journal of Financial Economics, Vol. 13, No. 1, (1984), pp. 65-89. citation courtesy of

Users who downloaded this paper also downloaded* these:
Poterba and Weisbenner w6616 Capital Gains Tax Rules, Tax Loss Trading and Turn-of-the-Year Returns
Bogart and Gentry w4254 Capital Gains Taxation and Realizations: Evidence from Interstate Comparisons
Barberis and Xiong w12397 What Drives the Disposition Effect? An Analysis of a Long-Standing Preference-Based Explanation
Cooper, McClelland, Pearce, Prisinzano, Sullivan, Yagan, Zidar, and Zwick w21651 Business in the United States: Who Owns it and How Much Tax Do They Pay?
Constantinides and Ingersoll Jr. w1184 Optimal Bond Trading with Personal Taxes: Implications for Bond Prices and Estimated Tax Brackets and Yield Curves
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us