Modeling Capital Gains Taxes for Trading Strategies of Infinite Variation
In this article, we show that the payment flow of a linear tax on trading gains from a security with a semimartingale price process can be constructed for all càglàd and adapted trading strategies. It is characterized as the unique continuous extension of the tax payments for elementary strategies w.r.t. the convergence “uniformly in probability.” In this framework, we prove that under quite mild assumptions dividend payoffs have almost surely a negative effect on investor’s after-tax wealth if the riskless interest rate is always positive. In addition, we give an example for tax-efficient strategies for which the tax payment flow can be computed explicitly.