Modeling capital gains taxes for trading strategies of infinite variation

Abstract

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 c\`agl\`ad 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.