Tax Threat Prompts Selloff

Politicians are locked in a battle that will determine which Americans pay higher taxes. But many investors aren't waiting to find out the answer.

The prospect of higher taxes on capital gains is prompting many to unload some of their winning stocks.

Tax-induced selling is one factor some market watchers attribute to the recent declines.

The potential rise in the capital-gains tax is included in a raft of potential year-end tax increases and spending cuts, known as the fiscal cliff. Leaders in Washington are likely to spend weeks wrangling over which taxes get increased, and many investors anticipate capital gains will be one of them.

The wave of selling is a twist on the usual year-end rush among financial advisers, who typically help their clients sell their losing stocks to offset gains from other investments.

The Standard & Poor's 500-stock index has climbed 9.7% this year, but stocks continue to find skeptics, who point to Europe's debt crisis, Washington's political gridlock and disappointing corporate earnings.

Any increase in taxes on investment gains would dig into the paper gains that investors have enjoyed as the S&P 500 doubled off its March 2009 lows.

That could be behind the recent selling, investors say. Even those who predict Congress does a deal may be selling simply because they think others will.

Under the current rules, married joint filers with taxable income above $70,700 in 2012 pay 15% on long-term gains of assets they sell. But that rate is set to rise to 23.8% on Jan. 1 for most couples with more than $250,000 of adjusted gross income. Dividend taxes could jump to as high as 43.4%—almost triple the current rate of 15%.

It is hard to assess what impact this selling may have on the market. Many investors hold their stocks in tax-deferred or tax-exempt accounts, and the tax increase applies only to stocks that have been held longer than one year. Also, it doesn't apply to large institutional investors.

Source:  Wall Street Journal

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