Effective Capital Gains Tax because, necessary, percentage, investment

Zesty

Hey All,

First time poster here. I wanted to ask about this because neither Schweser nor the CFA curriculum deemed it necessary to explain this further. Clearly they thought a smart Level 3 candidate should be able to figure this out, but this apparently isn't the case for me.

The formula (taking Schweser's notation):
Tecg = Tcg * ((1 - Pi - Pd - Pcg) / (1 - (PiTi + PdTd + PcgTcg))

Numerator is investment income percentage from unrealized capital gains. Denominator is 1 minus the total realized tax rate.

I may be missing something obvious here, but how does this formula lead to the effective capital gains tax rate?

Thanks in advance for any insight,
HoJoon

Analyze_This

markCFAIL, thanks for your response.

I understand conceptually that the effective cap gains tax rate should be lower than the stated cap gains tax rate because we're not counting the taxes that's already been realized/paid.

But my question is more specific to the formula, how does dividing the income percentage from unrealized capital gains by 1 minus the total realized tax rate and multiplying by stated cap gains rate equal the effective cap gains rate?

I think maybe I'm getting tripped up by the denominator 1 minus the total realized tax rate, struggling to grasp what that means conceptually.

Thanks again.

wake2000

what does it matter? just memorize it, then forget it after the test. If a conceptual question happens to be asked you should be able to back out the answer by knowing the formula