This paper considers an extension of the Merton optimal investment problem to the case where the risky asset is subject to transaction costs and capital gains taxes. We derive the dynamic programming equation in the sense of constrained viscosity solutions. We next introduce a family of functions $(V_\varepsilon)_{\varepsilon>0}$, which converges to our value function uniformly on compact subsets, and which is characterized as the unique constrained viscosity solution of an approximation of our dynamic programming equation.