Optimal tax-timing and asset allocation when tax rebates on capital losses are limited

► We study the portfolio problem when capital losses qualify for tax rebate payments. ► We examine optimal timing of realization of capital gains. ► Higher tax rate on losses than on gains makes realizing capital gains frequently desirable. ► With tax rebate payments investors hold more equity and attain higher welfare levels. ► Benefit from having losses subsidized exceeds suffering from having profits taxed.