freeus, I rummaged about, and couldn't find the link to the original post re taxes. So here's a fresh analysis:
I posted the other day that TLAB was 100 bagger after coming public in 1982. That works out to an annual pretax rate of return of 33.35%. If you held today, you would receive your original investment plus 81% of the profit, giving you an after-tax rate of return of 31.71%.
Now, suppose you traded TLAB extensively during the same period, and suppose the short-term capital gains tax was exactly the same as the long term rate (19%) that I used above. Now, your annual after-tax return drops from 31.71% to 27.01%! That difference is due to the fact that you can think of the unpaid taxes as an interest-free, non recourse loan from the government (I know that's a hard concept for a libertarian <VBG>, but it really helps in trying to understand the dynamics)And the difference becomes even more startling when we use the current short-term capital gains rate of 29%. The after-tax rate falls to 23.68%! And we haven't even considered transaction costs.
So, $10,000 invested in 1982 would be $820,162 in the buy and hold strategy, and $299,772 in the active trading strategy.
Now here is the really startling part of the analysis. Given the tax assumptions I made above, in order for a trader to achieve the same results (in TLAB) as a buy and holder he must gross 42.41% before taxes. [Was it the Red Queen in Alice In Wonderland who commented about having to run quickly just to remain in the same place?]
I hope this helps.
Regards,
Paul |
