Capital taxation is a central component of the U.S. fiscal system: realized gains totaled $1.4 trillion in 2024, and their preferential tax treatment amounted to $244 billion in foregone federal revenue. This paper studies the response to capital gains taxation across the wealth distribution.
Who Harvests? Tax Alpha and Heterogeneous Responses to Capital Gains Taxation
Federico Mainardi
Research
65 Pages
Key Takeaways
Wealthier Households: Wealthier households are more responsive to capital gains taxes, realizing a smaller fraction of gains and a larger fraction of losses than less wealthy households, consistent with tax-loss harvesting. These patterns are amplified during market downturns and are concentrated among households supervised by sophisticated financial advisors, especially private banks.
Tax-Alpha: Effective tax burdens decline with wealth, generating a 50-basis-point annual tax alpha for wealthier households—a differential amounting to at least one third of pre-tax return gaps previously documented in the literature. This tax gain does not come at the expense of lower pre-tax performance or higher risk and represents therefore a genuine alpha.
Wealth Impact: Absent this tax alpha, I estimate that the growth in the aggregate wealth share of the top 1% of households would be 3.5 percentage points lower over an horizon of thirty years.
Join our newsletter to have all of this content + Exclusive Newsletter Bonus Content delivered to your inbox every week
Related Content
