The 46% Surprise: How Holding Long-Term Crushes Short-Term Trading Taxes

Have you ever wondered how much short-term versus long-term taxes actually affect your net worth and portfolio over time?

Let’s imagine a $100,000 portfolio goes up 20% annually and is taxed at the end of the year at 33% due to short-term capital gains. What would the portfolio grow to after 10 years?

Now make a guess as to what it would grow to after 10 years if held long-term and a 20% tax applied at the end of the 10 year period?

You might be surprised at the results, and even more so how they change over an even longer time span.

What Do You Make If You Pay Short-term Taxes?

Let’s imagine you begin with $100,000 and your portfolio grows by a stunning 20% annually but instead of letting the money ride, you lock in gains by year-end. Or maybe you just have a lot of positions throughout the year and collectively they result in a portfolio hike of 20% on average over a ten year period.

Each year, the portfolio grows by 20% so for example, on $100,000, a 20% gain would add $20,000, bringing the total to $120,000 before taxes but because this is considered short-term gains, we’ll assume a 33% tax applies immediately to the $20,000 profit, meaning $6,600 is taken in taxes, leaving $13,400 of net gain.

In other words, the after-tax growth factor each year is:

• Gross growth factor: 1 + 20% = 1.20
• Tax on gains: 33% of 20% = 6.6% of the original principal
• Gains after taxes: 20% – 6.6% = 13.4%

So each year the portfolio effectively grows by about 13.4% after tax, making the after-tax growth factor roughly 1.134 per year.

What Happens After 10 Years?

After 10 years, the portfolio’s value (V) would be:

V=$100,000×(1.134)^10

Approximating the compound factor (1.134^{10} ≈ 3.521

V≈$100,000×3.521=$352,100

After 10 years of growth and annual taxation, the portfolio is worth about $352,100.

At the end of the first year, before tax, the portfolio would have grown to $120,000. After paying 33% on the $20,000 gain ($6,600), the ending balance is $113,400.

By the end of year five, using the 1.134 growth factor annually, the portfolio grows to approximately $113,400 × (1.134^4) ≈ $113,400 × 1.657 ≈ $188,228.

By the end of year ten, as calculated, it hits around $352,100. This steep reduction from the no-tax scenario highlights how the yearly tax drag compounds.

Even though the portfolio is still more than triple the original size, it’s significantly lower than it would be if taxes were deferred.

Long-Term Holding: What If You Paid 20% Tax After 10 Years?

We’ll assume you begin with the same starting amount here of $100,000 and also make 20% a year but instead of paying taxes every year you do so just once at the end of the decade at a long-term capital gains rate of 20%.

Growth Without Annual Taxation:
With no taxes applied until the end of the 10th year, the portfolio compounds at a full 20% each year. The value (V) after 10 years before tax would be:

V=$100,000×(1.20)^10

Calculating (1.20)^{10} ≈ 6.1917

V≈$100,000×6.1917=$619,170

Now applying the 20% tax on the gains, you end up with a gain of $619,170 – $100,000 = $519,170.
So a 20% tax on $519,170 is about $103,834.

After paying this one-time tax, the remaining amount is:

$619,170−$103,834=$515,336

After 10 years, and then paying a 20% tax on the total gain at the end, the portfolio ends up at approximately $515,336.

Looking at the fifth-year mark under no annual taxation, the portfolio would grow to $100,000 × (1.20^5) ≈ $100,000 × 2.4883 ≈ $248,830, still tax-free at this point.

By year seven, it grows to roughly $100,000 × (1.20^7) ≈ $358,310. Each year’s compounding adds a substantial amount because no tax is eroding the principal. Only at the end of the 10th year do you pay tax on the cumulative gain.

This deferred taxation allows the portfolio to compound more effectively, resulting in a final amount of about $515,336 that is significantly higher than the annually taxed scenario.

The difference is eye-popping at the end of the 10 year period.

• Short-Term Annual Taxation (33% Each Year): Approximately $352,100 after 10 years.
• Long-Term Holding with One-Time 20% Tax at the End: Approximately $515,336 after 10 years.

The lower tax rate approach leads to 46% more money in your pocket by choosing to hold versus sell regularly and suffer from the short-term tax gain hit.

How Does This Look After 20 Years?

If we extend the timeline from 10 years to 20 years, the results look even more dramatic because the short-term portfolio of $100,000 grows to $1,240,000 but the long-term portfolio now is starting to look exceptionally attractive at $3,084,000.

And if you think that’s a big difference, wait until you see what happens from the effect of compounding over one additional decade.

Short-term Gains Vs Long-term Gains over 30 Year Period

Over a 30 year time span the short-term portfolio gaining 20% annually but paying short-term taxes each year grows to an impressive $4,370,000 but the long-term portfolio absolutely blows it away by mushrooming to $19,020,000.

What the results show is that simply holding on and doing nothing is quite powerful. In fact, if you were to ask this  question, for the short-term portfolio taxed annually as you have calculated over a 30 year time span to equal the same as the long-term portfolio taxed one time, what percentage would the short-term portfolio have to rise by annually, the results may startle you.

Because the answer to the question is that the short-term portfolio’s pre-tax annual return must jump from 20% to around 28.6%. After applying the 33% tax each year, that 28.6% pre-tax return shrinks to roughly 19.1% effective growth annually.

And if you think about that a little more deeply you’ll see that not even Warren Buffett was able to achieve that pace of growth, so the smarter approach is to HODL as they say versus trade frequently and pay the government a bulk of your gains. Uncle Sam is taking no risk while you take 100% of the risk so why not take most of the spoils.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.