The article in question: Capital Gains Tax 101
The specific area I was interested in was how selling and capital gains affects compound interest. Luckily, this article has a section on just that! And bonus, it has a table! But I'm a little confused about the numbers there.
The article is comparing two hypothetical investors, let's call them Alan and Bob. Alan buys and holds for 30 years, earning 10% a year, reinvesting everything. Bob buys and sells exactly once a year, reinvesting everything, but therefore paying capital gains every year. The article awards him a higher rate of return of 12%, however, for his activism. Here's the table from the article:
| Long-Term (10%) | Short-Term (12%) | |
|---|---|---|
| Initial Investment | $10,000 | $10,000 |
| Capital gain after one year | 0 | $1200 |
| Tax paid @ 20% | 0 | $240 |
| After-tax value in one year | $11,000 | $10,960 |
| After-tax value in 30 Years | $139,595 | $120,140 |
So I have two problems with this table. The first is that it doesn't take into account the final tax bill. Let's say both Alan and Bob decide to liquidate their assets after the 30 years. Well, Alan has to pay taxes on $129,595, but Bob only has to pay taxes on...well, some number much smaller. What is that number, exactly? Well, that leads me to the second problem.
I don't know where the author got these numbers. Using a simple compound interest calculator, Alan after 30 years should have $174, 494.02. That's a substantial difference. I get the same figure if I compound the interest myself.
The number for Bob is of even more interest. Crunching those calculations, I end up with $172,549.46 for Bob at the end of 30 years. That's very close to Alan's number! And Bob only has to pay capital gains tax on $15,642.55, as opposed to Alan's $164,494.02.
So, am I way off base here, and, if so, what am I missing?
Submitted October 19, 2017 at 05:44PM by compuzr http://ift.tt/2gn5pjp
