Hold or sell? How capital gains taxation affects holding decisions

Annika Hegemann, Angela Kunoth, Kristina Rupp, Caren Sureth-Sloane

Publication: Working/Discussion PaperWU Working Paper


Investments with exit flexibility require decisions regarding both the investment
and holding period. Because selling an investment often leads to taxable capital gains, which
crucially depend on the duration of an investment, we investigate the impact of capital gains
taxation on exit timing under different tax systems. We observed that capital gains taxation
delays exit decisions but loses its decision relevance for very long holdings. Often the optimal
exit time, which indicates the maximal present value of future cashflows, cannot be determined
analytically. However, we identify the breakeven exit time that guarantees present
values exceeding those of an immediate sale. While, after-taxes, an immediate sale is often
optimal, long holding periods might also be attractive for investors depending on the degree
of income and corporate tax integration. A classic corporate tax system often indicates
holdings over more than 100 periods. By contrast, a shareholder relief system indicates the
earliest breakeven exit time and thus the highest level of exit timing flexibility. Surprisingly,
high retention rates are likely to accelerate sales under a classic corporate system. Additionally,
the worst exit time, which should be avoided by investors, differs tremendously across
tax systems. For an integrated tax system with full imputation, the worst time is reached
earlier than under partial or non-integrated systems. These results could help to predict investors'
behavior regarding changes in capital gains taxation and thus are of interest for both
investors and tax policymakers. Furthermore, the results emphasize the need to control for
the underlying tax system in cross-country empirical studies. (authors' abstract)
Original languageEnglish
Place of PublicationVienna
PublisherWU Vienna University of Economics and Business
Publication statusPublished - 2015

Publication series

NameWU International Taxation Research Paper Series

WU Working Paper Series

  • WU International Taxation Research Paper Series

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