Abstract The article provides information on the working paper, Optimal Stock Trading With Personal Taxes: Implications for Prices and the Abnormal January Returns, by George M. Constantinides. This analysis concludes that some investors can profit by selling stocks in which they have long-term gains. The investor can realize long-term gains and repurchase either similar stock or the same stock 31 days later in order to re-establish the short-term status and realize future losses at the advantageous short-term rate. The author simulates the returns of an investor in the 50 percent tax bracket by following several trading, strategies. He assumes a one-year holding period for long-term gains and that the investor cashes out at the end of the period by selling the stocks and paying any capital gains taxes or capturing the tax benefits of capital losses. Under all three strategies there is an improvement in the investor's wealth position with high-variance and medium-variance stocks. The author concludes that tax strategies can produce seasonality in the trading pattern at year-end but the strategies cannot explain the abnormally high returns of small firms in recent years.
Philip J. Harmelink (Sat,) studied this question.