Hello,
Suppose you are in the 30% income tax bracket, vs. a 15% capital gains tax bracket. Then:
For long-term capital gains tax, you need to earn 117.7 dollars to end up with 100 dollars after tax:
117.7(.85) = 100
For short-term trades with a 30% income tax rate, you need to earn 142.9 dollars to end up with 100 dollars after tax:
142.9(.7) = 100
This means you need to earn 142.9 vs. 117.7.
142.9/117.7= 1.21
So your percentage gain has to be 21% higher via short-term trading to match what you would get in a long term trade.
So if you could get 20% in a long term trade, you would have to get 20(1.21) = 24.2% gain in a short term trade to get the same amount after tax.
Is this concept correct?
The amount is higher, but not insurmountably so. This means if you see a good short term opportunity, the higher tax should not shy you away from taking it.
Suppose you are in the 30% income tax bracket, vs. a 15% capital gains tax bracket. Then:
For long-term capital gains tax, you need to earn 117.7 dollars to end up with 100 dollars after tax:
117.7(.85) = 100
For short-term trades with a 30% income tax rate, you need to earn 142.9 dollars to end up with 100 dollars after tax:
142.9(.7) = 100
This means you need to earn 142.9 vs. 117.7.
142.9/117.7= 1.21
So your percentage gain has to be 21% higher via short-term trading to match what you would get in a long term trade.
So if you could get 20% in a long term trade, you would have to get 20(1.21) = 24.2% gain in a short term trade to get the same amount after tax.
Is this concept correct?
The amount is higher, but not insurmountably so. This means if you see a good short term opportunity, the higher tax should not shy you away from taking it.
