Similarly I did not want to sell my shares in Google to buy shares in the Facebook IPO (even though I felt Facebook would generate better returns) because I would have to pay capital gains tax.
This shows why a simple model for capital gains tax leads to inefficient capital allocation.
Instead, the CGT rules should be cumulative like this: Let's say you buy at $1 million and then sell at $10 million after 10 years: That is an annual return of 25.9%. If the annual capital gains tax rate is 20%, that would leave you with a return of 20.7% per annum. So after 10 years your $1 million investment is worth $6.56 million after tax. That is, you must pay $3.44 million in capital gains tax.
