Abstract: We propose a novel optimal consumption and optimal investment model with differential long-term/short-term tax rates. The optimal trading strategy is characterized by a time-varying no-transaction region outside which it is optimal to realize capital gain or loss to achieve the optimal fraction of after-tax wealth invested in stock. We show that (1) it can be optimal to defer capital loss realization even in the absence of transaction costs and wash sale restriction; (2) an investor subject to capital gain tax may be better off than a tax-exempt investor; (3) the current U.S. capital gain tax law is against the poor. This is joint work with Hong Liu and Yifei Zhong.