The Impact of Taxes

In my last post, where I linked the Peter Brandt interview, I was myself surprised by how big a investment of just a hundred thousand could turn out to be. Since the results are said to be audited, I have no doubt that the numbers are real. What I missed though is the impact of taxes and how they can literally destroy long term gains.

World over, Short term capital gains is taxed more than Long term capital gains. While in India, Long term tax is free, if you were to generate majority of Income via trading, your Income could be treated as Business Income and taxed at the appropriate slab.

As I wrote in my previous post, if you are able to generate 41.6% year on year (compounded), a investment of just a Lakh would turn out to be worth more than 340 Crores. But how much impact do taxes have? The calculations really surprised me as the damage, especially if taxation is high can hit really hard on the eventual pot of gold at the end of the rainbow

Here is the table of Calculations

A tax of 30% would make the moolah appear way too small by comparison to what without taxes seem to suggest. In fact, we lose nearly 94% of the growth due to the periodical dipping into the capital to pay the taxes on the gains we make.

Generating income from short term trading is tough, but as the above data suggests, even after sweating blood and endless sleepless night, you could actually we way better by long term passive investing. Its no wonder that everyone wants to sell you short term advise than trade the same on their own funds.After all, why bother with the risks, when sheep willing to offer themselves as the sacrificial lambs, Right? 🙂