Tax calculation for deferred tax

[Jovensky]

Hi

Please refer to the following excerpt from Schweser notes on Reading #9 on deferred tax:

http://prntscr.com/dkvcuo

For the passive investor tax calculation, why does the calculation adds back 1000(0.2)?

Thanks.

[Flashback]

Initial cost basis is 1 in this example, so the entire tax on initial investment is added back. Otherwise it would be added back (+ t_cg x B) if B is not equal to 1. Initial basis is not taxed in this example.

[Jovensky]

Thanks Flashback. That was really helpful.

[Flashback]

No problem. I’m glad to help.