I have a doubt related to Tax drag percentage in Deferred Capital gain taxation. As, we have studied that Tax drag percentage remains same as Tax rate for this taxation irrespective of the Cost Basis.
But in Schweser, there is a question, which says if B<1, then Tax Drag %age > Tax rate.
Can someone please clarify what is the nature of Tax drag %age with respect to Cost Basis in Deferred Capital gain taxation?
can you please post that specific question here to better answer your query.
Here, they have committed error in calculating Gain (without tax) when cost basis is changed.
Gain (wt ) = FV (wt) – Cost basis = 6727.5 – 800 = 5927.5
now, tax drag = FV (wt) – FV (at ) = 6727.5 – 4949.25 = 1778.25
Now, tax drag (%) = Tax drag($)/ gain (wt) *100 = 1778.25/5927.5 * 100 = 30%
similarly, you can check when cost basis is 1200