Realizing capital gains when tax rates are lower
If you’re a U.S. resident, you’ve probably already filled out your tax forms. (Unless you like procrastinating. In which case, you’ve got one month left.) FRED has plenty of data from the Internal Revenue Service that describe tax filings. Some series count the number of individuals filing and the amounts in various parts of their tax declarations. This graph shows the number of people declaring net capital gains. Clearly, the number decreased significantly when the stock market was doing poorly, but it was far from zero: The troughs were about half of the peaks. The reason is that only realized capital gains are taxed—that is, when a stock is sold. Even during the worst times, many of those selling their stocks were still realizing gains compared with the prices of the stocks when they originally bought them. And timing the sale of stocks may be to a taxpayer’s advantage if it allows him or her to benefit from lower marginal tax rates. Similarly, a prolonged stock market rally doesn’t necessarily translate into immediate additional capital gains…unless people sell their stocks during the rally. But periods of high income for taxpayers may not be the right time to sell stock if it pushes them into higher tax brackets.
How this graph was created: Search for “individual income tax filing” and click on the desired series.
Suggested by Christian Zimmermann.
View on FRED, series used in this post: