With CG Tax, the Tax Drag % is said to = Tcg, even when Return or Time Horizon fluctuate.
It seems to me that this relationship holds only when the Basis = 1
If Basis = let’s say 0.75, it seems to me that the relationship doesn’t hold anymore.
Basis decreases - you would pay more tax, so tax drag would increase.
agreed, if CG taxes are applied on a deferred basis & cost basis = mv…Tcg % = Tax drag %
if cost basis decreases, it would result in Tax drag % slightly greater than Tcg %
Tax drag % can be lower than tax rate. Right?
how thru tax loss harvesting?
I dont think so it should be atleast equal to tax rate…
Simple way to answer this is just plug in numebrs.
Assume: N=20, R = 10%, Tax Rate CG = 30%
If basis = 100%, the Tax Drag $ = 1718.25, or 30%
If basis = 75%, tax drag = $1793.25, or 31%
So if basis is ess than 100%, tax drag will increase. This makes snese intuitively, because you will owe more tax.
Sorry guys, maybe my question should have been a little more clear.
What I meant was that with a CONSTANT Basis of less than 1, making Return or Time Horizon fluctuate changes the Tax Drag % when I compute it.
I was confused because Schweser says that Tax Drag % is constant and = Tcg regardless of Return or Time Horizon, with no mention of the Basis.
if tax basis = 1, then tax drag = tax rate for deferred cap gains no matter the return or time horizon
…and when Basis < 1, what happens with TaxDrag % when you play with R and Time Horizon ???