Taxes are not a footnote—they’re a performance variable.
Smart investors don’t just ask, “Will this trade work?”
They ask, “What do I keep after taxes?”
What you keep matters more than what you make.
Many traders focus on gross returns and ignore taxes until it’s too late. In reality, taxes are one of the biggest drags on trading performance. The market doesn’t care about your pre-tax gains—your net outcome does.
Short-Term vs. Long-Term Capital Gains
Holding period matters.
Profits from trades held for a year or less are typically taxed at ordinary income rates. Longer-term holdings often benefit from lower capital gains rates.
Real-world example:
A trader makes frequent short-term trades with solid returns, but a large portion of gains goes to taxes. Another investor earns similar returns by holding quality positions longer and keeps more of the profit after taxes.
High Turnover = Higher Tax Drag
More trades usually mean more taxable events.
Real-world example:
An active trader may be right often, but each profitable trade triggers a tax bill. Over time, this reduces the compounding effect compared to a lower-turnover strategy with fewer realized gains.
Losses Are Useful, But Limited
Losses can offset gains, but not perfectly.
Real-world example:
A trader realizes losses late in the year to offset gains, reducing the tax bill. However, rules around wash sales can limit how losses are applied if positions are repurchased too quickly.
Account Type Changes Everything
Where you trade matters as much as how you trade.
Real-world example:
A trader uses a taxable account for frequent trades and sees profits eroded by annual taxes. Another uses a tax-advantaged account for higher-turnover strategies, allowing gains to compound without immediate tax impact.
Tax Efficiency Is a Strategy Choice
Ignoring taxes turns good trades into mediocre outcomes.
Real-world example:
Two investors earn the same pre-tax return. The one who considers holding periods, account placement, and realization timing ends the year with meaningfully higher net returns.