Tax drag and capital gain taxes with cost basis

When calculating the tax drag for capital gain taxes with cost basis, what do we use as denominator? (P is the principle investment amount, B is the basis.) P[(1+R)^{n}(1-T)+TB)]-P or P[(1+R)^{n}(1-T)+TB)]-PB But looks to me either way, tax drag is going to be greater than the tax rate, am I correct? And tax drag is positively correlated with both time horizon and return, but negatively correlated with B?


I see in the Scweser formula sheet it says tax drag > tax rate. I have found this to be the case when this comes up on mocks or q-bank so far.

which SS please?

It’s in SS70. I think tax drag > tax rate and it is positively correlated with R and N, and negatively correlated with B (since if B = 1, tax drag = tax rate). Does this sound right? How about the calculation of tax drag. For the denominator, do we always subtract the initial investment amount from it? Thanks!

That sounds right. Stalla made a big point about tax drag but there is no LOS and it isn’t in the CFAI’s index or glossary.

yes for tax drag you remove the initial investment amount always.