# REading 15 CFA Text no 14 vs no 4

Why is it number 4 adds back the taxes on the base principal , but number 14 doesn’t Both are deferred capital gains calcs…

I don’t have the book in front of me, but I’m assuming #4 has basis that is different from its cost.

bpdulog Wrote: ------------------------------------------------------- > I don’t have the book in front of me, but I’m > assuming #4 has basis that is different from its > cost. nope…

I got it now. In question 4, you are paying taxes only on the capital gain portion of your ending portfolio value. While in question 14, you are paying taxes on the capital gain including your cost basis.

Question 4: Beginning value = 250,000 Ending value = 739,719.3382 Capital gain = 489,719.3382 CG Tax = 48,971.9338 Ending value - CG Tax = 690,747.4044

bpdulog Wrote: ------------------------------------------------------- > I got it now. In question 4, you are paying taxes > only on the capital gain portion of your ending > portfolio value. While in question 14, you are > paying taxes on the capital gain including your > cost basis. The answer is that one is special tax deferred account, so we are assuming we have to pay taxes on the entire amount, because initial investment is pretax in that type of account In the earlier case, we were assuming that taxes were already paid on the initial 250k - it wasn’t in a tax deferred account. I was confusing the concept of dividends on an after tax initial investment with a tax deferred account.

rolo550 Wrote: ------------------------------------------------------- > bpdulog Wrote: > -------------------------------------------------- > ----- > > I got it now. In question 4, you are paying > taxes > > only on the capital gain portion of your ending > > portfolio value. While in question 14, you are > > paying taxes on the capital gain including your > > cost basis. > > > The answer is that one is special tax deferred > account, so we are assuming we have to pay taxes > on the entire amount, because initial investment > is pretax in that type of account > > In the earlier case, we were assuming that taxes > were already paid on the initial 250k - it wasn’t > in a tax deferred account. I was confusing the > concept of dividends on an after tax initial > investment with a tax deferred account. What do you mean by special tax deferred account? There’s no such thing, they’re one in the same for CFA purposes. In addition, dividends don’t even come into play into either of these questions. I think you’re confusing a tax deferred account versus an account that is subject to deferred capital gains tax. The tax treatment on both are different.

Assets held in a TDA accumulate on a tax deferred basis. Tax is owed when funds are withdrawn at the end of an investment horizon at which time withdrawals are taxed at ordinary rates or another rate, Tn, prevailing at the end of the invest- ment horizon. The future after-tax accumulation of a contribution to a TDA is therefore equal to FVIFTDA 􏰄 (1 􏰆 r)n(1 􏰂 Tn) The form of Equation 7 is similar to the future value interest factor when tax is based entirely on capital gains that are recognized at the end of the investment horizon with a cost basis equal to zero (see Equation 3) (Level III Volume 2 Behavioral Finance, Individual Investors, and Institutional Investors , 4th Edition. Pearson Learning Solutions 192).

> I think you’re confusing a tax deferred account > versus an account that is subject to deferred > capital gains tax. The tax treatment on both are > different. Yep…that is exactly what I meant. I’m quite often not a clear poster >In addition, dividends don’t even come into play into either of these questions. DOH!! I meant capital gains… It should have read, “I was confusing the concept of not having to pay taxes on capital gains on an account started with after tax funds” (deferred capital gains account). See what happen when you post after studying all day? Brain rot…

i still keep falling into this trap and im getting more and more frustrated.

cookthebooks Wrote: ------------------------------------------------------- > i still keep falling into this trap and im getting > more and more frustrated. TDA? Tax entire amount. Not TDA? Only tax the gain.

TDA? Tax entire amount. (don’t add back the tax rate in the FVIF. You never paid taxes on the cost basis so gov’t takes a bite of the entire apple. Simple. Think basic 401k) Not TDA, but cap gains are deferred? (add the tax rate in FVIF equation. you already paid the taxes on the cost basis, so gov’t is only going to take a bite on the gain. Little trickier than TDA. think your charles schwab online brokerage acct)

thanks for the help! i always fall into the trap of thinking this stuff is divorced from the real world instead of attempting to explain the real world.