They can also inhibit people from selling, which can also have a negative effect on stocks. This results from the fact that investors must hold an asset for at least 12 months to get the long-term capital gains rate of 20 percent. Consequently, even when an investor knows that a stock he owns is going to fall, he may be reluctant to sell because he does not want to be taxed at rates up to 39.6 percent on short-term gains. This inhibits liquidity and makes it harder for investors to protect themselves from market downturns. The capital gains tax also encourages year end selling of stocks that have already fallen in price, because investors need the tax losses to offset their gains.
Government regulations are also a factor in the market's slide.
One is an IRS requirement that affects foreign investors, which became effective on Jan. 1. Known as the Final Withholding Regulations, they require foreign financial institutions to provide the IRS with extensive information about foreign investors in the United States. Obviously, anything that discourages foreigners from investing in U.S. stocks is going to have a very adverse effect on prices. In recent years, foreign capital inflows have been an important factor bidding up stock prices. Now, this capital is flowing instead to markets in London, Paris and elsewhere instead of New York.