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A turnover tax of 1 percent will apply to all investors for 2003. The Income Tax Commission is expected to make a final, authoritative announcement on the matter today, ending months of uncertainty in financial markets as to final form of this year's taxation on securities trading.

The possibility of a capital gains tax, instead of the originally planned turnover tax, would have a significant effect on large investors.

Previously the tax commission had stated that the turnover tax would be final for 95 percent of investors, and next year it would announce the minimum trading turnover which would require filing a return and paying full capital gains taxes. Since the tax authorities had not yet announced the minimum applicable turnover, investors were left in a fog and were worried about their future tax liabilities.

The announcement is likely to cause a wave of selling in the market. Many investors will prefer to realize their profits on this year's large gains in stocks, by selling now, and then buying the stocks back again; and paying only a small turnover tax instead of a large capital gains tax in the future. This will allow future capital gains to be calculated from the present high price, instead of previous lower prices, and reduce the capital gains tax liability.

However, the tax authorities will require the filing of returns for such transactions, if they seem to be artificial trades only for the purpose of reducing taxes.

Recent days have seen relatively large turnovers in the markets and increased volatility in share prices, as investors and institutions make trades in order to plan their tax liabilities. In particular investors want to offset profits with losses this year, since investors may roll losses over from year to year, but they cannot offset already paid capital gains taxes with future losses. In other words, investors who are expecting to be liable for capital gains taxes, are often willing to sell and lose money on other securities in order to avoid those taxes.

Mutual funds are also in the midst of such tax planning now, particularly those that have changed their tax liability classification as a result of the recent tax reforms. There are 60 such funds with total assets of NIS 10 billion.