Abstract
We examine the effect of confirmed and tentative changes in long-term capital gains tax rates on direction and magnitude of tax-induced trading. Results show that investors have an asymmetric response to tax rate changes. For all tax events, investors adjust trading in losers more than in winners. Between tax events, investors respond more to a tax rate decrease than to a tax rate increase for both losing and winning stocks. Tax-induced trading activity shows that investors do not differentiate between unconfirmed and confirmed tax rate increases. Uncertainty about an impending tax rate change alters investors’ trading behavior and may affect government tax collections.
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