Capital Gains Tax Rules, Tax-loss Trading, and Turn-of-the-year Returns


  • James M. Poterba,

  • Scott J. Weisbenner

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    • Department of Economics, Massachusetts Institute of Technology, and National Bureau of Economic Research (Poterba) and Department of Finance, University of Illinois—Champaign (Weisbenner). We are grateful to John Campbell, George Constantinides, Jerry Hausman, Josef Lakonishok, Terry Shevlin, Chester Spatt, René Stulz, Stanley Zin, and two anonymous referees for helpful comments. Andrew Mitrusi provided tabulations from the NBER TAXSIM files, and we also used information in the NBER Asset Pricing database. We thank the National Science Foundation and the Smith-Richardson Foundation for research support.


Changes in the capital gains tax rules facing individual investors do not affect the incentives for “window dressing” by institutional investors, but they can affect the incentives for year-end tax–induced trading by individual investors. Empirical evidence for the 1963 to 1996 period suggests that when the tax law encouraged taxable investors who accrued losses early in the year to realize their losses before year-end, the correlation between early year losses and turn-of-the-year returns was weaker than when the law did not provide such an early realization incentive. These findings suggest that tax-loss trading contributes to turn-of-the-year return patterns.