Trading costs and taxes: what really eats your returns

Every trade has a cost, and most of it is not on the price list. Small costs repeated hundreds of times can turn a good method into a losing one, and taxes take a share of whatever is left.

Lesson 16 of 76 · 3 min read

The real costs of trading

• Commissions: the fee the broker charges per trade. Some charge a fixed amount, others per share or a percentage, and some advertise zero.
• Spreads: the gap between the bid and the ask. You buy at the ask and sell at the bid, so every round trip pays the spread (see how the market works). It is small in liquid stocks and large in thin ones.
• Currency conversion: if your account is not in dollars, you convert your money to buy U.S. stocks and convert back to withdraw. A 1% fee each way is 2% per round trip, before you even trade.
• Slippage: the difference between the price you expected and the price you got, especially on stops, gaps and fast breakouts (see order types).
• Other costs: real-time data, platform fees, transfer and withdrawal fees, and interest if you use margin.

How frequent trading eats returns

Take a $10,000 account that trades positions of about $5,000. Suppose spread and slippage cost 0.1% on each side, so 0.2% per round trip, or $10, plus $2 in commissions. That is $12 per trade, which feels like nothing.

Now trade 20 times a month. That is 240 trades a year and $2,880 in costs, almost 29% of the account. The method has to earn 29% just to break even. The same trader making 3 well-chosen trades a month pays $432 a year, about 4%.

The lesson is not that you should never trade, but that every trade must be worth its cost. Fewer, better trades in liquid stocks, chosen with the screener and a plan, keep costs from swallowing your edge.

Keep records for taxes

In most countries trading profits are taxable, and your broker's statements may not give you everything you need, especially if you trade in a foreign market or currency. Keep your own records from the first trade:

• Date, stock, number of shares, buy price and sell price for every trade.
• Commissions and fees paid, which may reduce taxable gains in some countries.
• The exchange rate on the trade dates if you convert currencies.
• Dividends received and any tax withheld on them.
• Annual broker statements, saved for as many years as your country requires.

Capital gains, dividends and other rules

In general terms, a capital gain is the profit when you sell a stock for more than you paid; a loss when you sell for less. Many countries tax gains, and some treat short-term and long-term holdings differently. Dividends are cash payments from a company to shareholders; they are usually taxed separately, and when you own foreign stocks part of the dividend may be withheld at source before it reaches you.

Some countries also have wash-sale style rules: if you sell at a loss and buy the same or a very similar stock back within a short period, the loss may not count for tax purposes right away.

Tax rules depend entirely on the country where you live, and they change. This lesson is not tax advice. Always check with an accountant or tax adviser who knows your country before you start trading, not after the year ends. Logging every trade in the Portfolio makes that conversation much easier.

Costs and records at a glance

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