Diana Falsetta, The Impact of Income Tax Withholding and Stock Position on the Sale of Stock.
DIANA FALSETTA, The Impact of Income Tax Withholding and Stock Position on the Sale of Stock, Ph.D., University of South Carolina, 2002; Assistant Professor of Accounting, Northeastern University.
The primary objective of this study is to investigate the effect that taxpayers' income tax withholding position (tax payment or tax refund) and stock position (gain or loss) have on the sale of stock at the end of the year. Prior investigations of stock position have shown that individuals are more likely to sell gain stocks and hold loss stocks (e.g., the disposition effect). However, these studies have not considered tax implications on an individual's decision to sell or hold the stock. Two experiments (baseline and primary) were conducted to compare the sell or hold decision of participants, with either a gain or loss stock. Results of the baseline experiment confirm the disposition effect. When tax considerations are not the primary focus, participants were more likely to sell gain stocks than loss stocks. However, when participants become more sensitive to tax considerations, the results of the primary experiment support the tax-loss selling hypothesis. That is, participants tended to sell loss stocks and hold gain stocks in both a tax payment and a tax refund position. These results, while consistent with the tax-loss selling hypothesis, are contrary to the disposition effect, indicating that these effects are strongest when tax considerations are not a primary factor in the decision process. The findings suggest that both stock position and withholding position affect taxpayers' investing decisions.