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AN individual who owns a sizable block of stock in a public corporation,
and who has had the pleasure of watching that stock appreciate
in value over a period of years, frequently feels a need to diversify his
holdings. The decision to diversify would normally involve a sale of
the appreciated stock for cash and a reinvestment of the proceeds.
However, a sale for cash will occasion the imposition of a capital gains
tax equal at the maximum to 25%o of the gain realized,' whereas no
tax is imposed if the securities are simply retained. Since there is thus
a difference in tax cost between selling and retaining an appreciated
asset, the investor wishing to diversify is obliged to take the tax penalty
into account and to consider whether the benefits of diversification
are really worth a substantial reduction in his personal wealth. The
question is presumably a difficult one, and the investor's reluctance to
suffer an immediate and highly visible impairment of capital may ultimately
lead to the abandonment of what otherwise would commend
itself as a sound personal investment goal

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capital gains, capital exchange fund, tax law