Strategies that trade frequently usually have high turnover and are therefore taxed at a higher rate than strategies that hold positions for one year or longer. In this article we examine the tax consequences for high turnover strategies.
keywords: short term capital gains tax, investing, trading
Some of the most effective actively managed investing strategies profit from systematic short term (ST) investing. ST approaches may involve rapid trading with stock positions held for days or weeks at most. ST strategies can significantly outperform index funds (e.g., SPY, an S&P 500 index fund) in terms of total return.
In spite of the outperformance of ST strategies, investors are often advised to buy index funds instead of investing in ST approaches. The reasoning is that the higher returns of ST funds are offset by higher taxes on short term capital gains.
View the full blog at Augmented Trader: Do the returns of high turnover trading offset tax consequences?