Capital gains taxation and asset price volatility

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate. Published on 21 August 2026

Staff Working Paper No. 1,200

Pau Belda

Do capital gains tax cuts destabilize or stabilize asset prices? In an asset pricing model with heterogeneous agents and realization-based taxation, a tax cut has two opposing effects. It dampens volatility by reducing realization-based trading frictions, but also amplifies it by strengthening the pass through from expectations to prices, fuelling self-fulfilling fluctuations. Estimated on US stock-market data, the model implies that the sequence of tax cuts since the 1970s triggered a net increase in volatility of about +35%, driven primarily by stronger belief-to-price pass-through. Policy experiments suggest a tax on unrealized gains robustly reduces volatility, whereas a financial transaction tax has mixed effects.

Capital gains taxation and asset price volatility 

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