How Do Taxes Affect the Trading Behavior of Private Investors? Evidence From Individual Portfolio Data

Abstract

How do taxes affect the investment behavior of private stock-market investors? We exploit a large reform of capital-gains taxation in Germany combined with confidential portfolio-level daily panel data to study the causal effect of capital-gains taxes on individual stock-trading behavior and the disposition effect. We find substantial spikes in selling probabilities around an intertemporal tax discontinuity, and no such spikes after the abolishment of the discontinuity. Using difference-in-bunching methods and non-parametric regressions, we quantify the tax effect and identify interesting patterns of heterogeneity. Asset holding periods exhibit a tax elasticity of 0.368 for gains and -0.435 for losses. Because the theoretical tax effect on trading behavior runs in opposite direction to the well-established disposition effect, we further study the interaction between taxes and the disposition effect. We find evidence that the disposition effect is strongly affected by the tax discontinuity through tax motivated selling of both gains and losses.