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Capital Gain: Net Returns and Long/Short-Term Gains

(Only 2 Questions)

James Welling, a 37 year old engineer has an appointment to meet you in about an hour. As you are reviewing his accounts, you notice that he is a fairly active trader. He seems to do pretty well with returns that outpace the averages, but you can't help wonder how much he ends up paying each year in capital gains taxes.

As his appointment time approaches, you prepare a short explanation of the way that capital gains taxes may be hurting his net returns and the difference between short-term gains and long-term gains.

Prepare some detailed discussion points that cover the following:

1. How capital gains taxes may be hurting James' net returns?
2. The difference between short-term gains and long-term gains.

Solution Preview

Your solution is James is an engineer, so we can assume for practical purposes that he makes a salary that would put him above the lowest tax brackets. In this case, James is an "active trader" and does fairly well with his returns. One of the problems is that every time James sells a stock, he is taxed on the gain from the sale at the end of the year. This is true for both short term and long term ...

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