It is probably a lame question, but my brain freezed.
FVIFcg = (1 + r)n(1 – tcg) + tcg
Why do we add the Tcg in the above eqquation?
cost basis assumption, unless you want to get taxed for the full amount.
If the cost basis isn’t equal to 1 btw you’ll want to multiply the cost basis by the capital gains taxation rate before adding it onto the FV factor.
How about… full formula:
FVIFcg = (1 + r)n(1 – tcg) + tcg - (1-b)tcg
You say potato, I say tomato. . .
I like how you write your F and B… very nice.
im going to write my entire exam with caps lock on so the graders know I’m shouting at them
I do not get what do you mean by cost basis assumption. I don’t know why I can’t grasp this topic.
See what happens on a practical example if you dont add t_cg to the equation. Basically you will be taxing the principal amount of your investment, and not only your profits. by adding back tcg, you remove taxation on principal (think about the harsh effect of wealth taxes, it is sort of the same thing)
Cost basis: we are always calculating returns on the basis of an initial investment factor of 1. So your investment cost basis is 1 and your final return is 2, you made 100% and will be taxed on that amount. Supose now that you made several bad decisions on short term trades on a stock that you initially bought at 1 but by buying higher and selling lower, your average cost grew to 1.5. If at the end of the investment period your stock is worth 2.0, you made just 0.5 of profit, instead of 1.0, and therefore your tax bill will be lower. That is the effect of cost basis on capital gains taxes.
I already got it, seems that I did not get enough sleep 