Capital Gains Taxation and Tax Avoidance

Previous theoretical analyses of the capital gains tax have suggested that investors have considerable opportunity to avoid the tax. Yet, past empirical work found little evidence of such activity. Though confirming past findings that avoidance of tax on realized capital gains is not prevalent, we observe that tax avoidance activity increased after the Tax Reform Act of 1986, and high-income, high-wealth and sophisticated taxpayers were most likely to avoid tax. However, we find that most tax avoidance is of short duration. Thus, the effective tax rate on realized capital gains is close to the statutory rate in all years and tax brackets.