Tax Season Dips and Rebounds: How Filing Deadlines Affect Stock Markets
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Tax season begins January 29th and ends April 15th; stock markets often dip during this period as investors withdraw money to pay taxes.
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The "January Effect" theory states stock prices fall in December and rebound in January due to tax-loss harvesting and investors buying with year-end bonuses; however, this effect has faded over time.
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During the first 2 weeks of April when taxes are paid, the S&P 500 dips 0.2% on average but rebounds 1.7% just 2 weeks later.
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The "January Effect" was first noticed in 1942 but has become less pronounced as more investors became aware of it and transaction costs made gains negligible.
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Capital gains taxes apply to stocks; rates are typically lower for long-term gains than short-term. The IRS has rules against abusing tax-loss harvesting.