Program and Development Research

Program and Development Research

A Theoretical Analysis of Investor Behavior in Response to Capital Gains Taxation: Emphasizing the Role of Expectations

Document Type : Original Article

Authors
Hesamoddin Kordtabar Firouzjaei 1
Reza Mohseni 2
Saeid Shavvalpour 3
1 Master's Degree in Economic Development and Planning, Department of Economics, Faculty of Management, Economics and Progress Engineering, Iran University of Science and Technology
2 Associate Professor, Faculty of Economics and Political Science, Shahid Beheshti University
3 Associate Professor, Department of Economics, Faculty of Management, Economics and Progress Engineering, Iran University of Science and Technology
10.22034/pbr.2025.536280.1557
Abstract
Capital gains taxation plays a pivotal role in shaping investor behavior, particularly regarding the timing of asset sales and the realization of accrued gains. In economies characterized by regulatory volatility and institutional uncertainty(such as Iran) the investor's response to taxation is influenced not merely by statutory rates, but by expectations about future policy. This study aimed to analyze the dynamics of investor decision-making in the presence of capital gains taxes. Drawing on a theoretical framework based on intertemporal equilibrium modeling, the research developed a formal structure in which the investor optimizes realization timing by weighing after-tax marginal returns against the value of deferral. The model incorporated deterministic returns and finite investment horizons, allowing for functional analysis of first- and second-order conditions under different tax parameters. The findings indicated that statutory tax rates alone are insufficient to predict realization behavior. Instead, forward-looking expectations—particularly regarding future tax changes or preferential treatments—emerged as central to the investor’s decision process. The study concludes that effective capital gains taxation policies must go beyond rate-setting and address the need for stability, predictability, and credible long-term frameworks. Without such institutional reliability, even well-designed tax regimes may fall short of their behavioral and fiscal objectives.
Keywords
Capital Gains Taxation
Gain Realization
Intertemporal Decision-Making
Lock-In Effect

Subjects

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DOI: 10.1257/aer.20130098