This paper examines whether the trading decisions of institutional investors can be explained in part by the effects of taxation on portfolio returns. The trading strategy that maximizes benefits to owners in the absence of taxes on capital gains differs from the optimal strategy in the presence of taxes. In particular, it may be better to hold on to an appreciated security in order to defer the payment of capital gains tax. We find that taxable entities (or entities that manage portfolios on behalf of persons who are taxable entities) are 26% less likely to sell securities that trigger large capital gains than securities that trigger no capital gains. Also, tax considerations seem to weigh more heavily in trading decisions later in the fiscal year. The decision to sell a particular security appears to depend on the cumulative gain or loss realized by the institution so far in the tax year. Tax-exempt institutional investors (namely, private foundations, universities, and pension funds) do not exhibit these tendencies. Surprisingly, all institutions are less likely to sell securities that would trigger a large loss. The inventory flow assumption adopted for tax purposes affects the size of the gain or loss realized in the sale of a block of stock. Consistent with tax planning, a HIFO (highest in first out) inventory rule is most significant for taxable institutions; a FIFO inventory rule is most significant for non-taxable institutions. We provide some evidence on the effect on realized gains of the two different inventory methods.