Trading drag calculator

Both sides get the same gross return here — the trader is not assumed to pick badly. Only friction differs, and friction turns out to be enough.

Starting balance$50,000Years20Gross return — both sides8%Identical. The trader is not assumed to pick worse.Round trips per year50Cost per round trip0.05%Spread and fees. Even commission-free trades cost the spread.Short-term tax rate24%Gains taken within a year are taxed as ordinary income.Long-term tax rate15%The holder pays this once, at the end.

Taxable brokerage account. Untick for a retirement account, where only trading costs remain.

After 20 years, same gross return

Buy and hold$205,591

Trading 50× a year$113,411

Trading costs alone take 2.50% a year before tax. To finish level with buy-and-hold, the trader would need to earn 12.1% gross instead of 8% — an edge of 4.1 percentage points every year, sustained for 20 years.

Not once. Every year, after costs, for the whole period.

This assumes the trader realizes gains within each year and the holder defers until the end, which is the structural difference between the two approaches. It ignores loss harvesting, wash-sale rules, dividends, and the possibility of a genuine edge. Tax rates depend on your bracket and the rules change — check irs.gov.

The comparison most arguments get wrong

Debates about trading usually turn on whether anyone can beat the market, which is unresolvable in a comment thread. So this tool skips it: both sides are handed identical gross returns. The trader is exactly as good at picking as the holder.

What is left is friction, and friction is not a matter of opinion. It is arithmetic that applies whether or not the trades were good ones.

The two frictions

Cost per trade. Commission-free does not mean free — every round trip crosses the bid-ask spread. A fraction of a percent sounds trivial until it is multiplied by fifty or two hundred round trips a year, at which point it becomes a permanent annual haircut on the whole balance.

Tax timing. This one is larger and less visible. A holder’s gains compound untaxed for as long as the position is held; tax arrives once, at the end. A trader realizes gains continually, so tax is paid every year — and money paid in tax is money no longer compounding. Gains realized within a year are generally taxed as ordinary income, at a higher rate than long-term gains.

Neither of these requires the trader to be wrong about anything. They apply to a trader who is right.

What the break-even number means

The tool works out what gross return the trader would need just to draw level. That figure is the honest version of the question: not “can I beat the market?” but “can I beat it by this much, every year, for twenty years?”

The gap widens with turnover. At high trade counts the required edge becomes large enough that it is worth being honest about whether anyone sustains it.

Where trading friction largely disappears

Untick the taxable-account box. Inside a tax-advantaged retirement account, gains are not taxed as they are realized, so the tax drag vanishes and only trading costs remain.

This is a genuinely useful thing to know: the same activity carries very different costs depending on which account it happens in.

What this ignores

Tax-loss harvesting, which can offset some of the drag. Wash-sale rules, which limit that. Dividends, margin, and the value of your own time. It also assumes a constant return rather than the lumpy reality, and it cannot model whether a genuine edge exists — it simply shows how large one would have to be.

Tax rates depend on your bracket and on rules that change. Check irs.gov, and treat the defaults here as illustrative.

Educational only. This explains how these products and accounts work in general. It is not financial, tax, or legal advice, and not a recommendation to buy anything. Your situation is specific to you — check with a licensed professional before acting.