Optimal investment with deferred capital gains taxes

We solve the optimal portfolio problem of an investor in a complete market who is liable to deferred taxes due on capital gains, irrespective of their origin. In a Brownian framework we explicitly determine optimal strategies. Our analysis is based on a modification of the standard martingale method applied to the after-tax utility function, which exhibits a kink at the level of initial wealth, and Clark's formula. Numerical results show that the Merton strategy is close to optimal under taxation.