Tax Drag

Taxes...are a drag. That’s pretty much what “tax drag” means. (See: Deadweight Loss.) RuPaul is not involved.

Tax drag is the loss of would’ve-been income because of taxes. Whether that’s income taxes or capital gains taxes, tax drag is real. It's often used to contrast forms of income that aren’t taxed...or forms of income with special tax rules, things like municipal bonds and retirement savings. It can also describe the difference between two securities that are taxed at different rates because they’re in different countries.

Since taxes can eat away at investments, an investment’s tax drag is something for investors to take note of, just like inflation and fund management fees. For instance, in the U.S., there’s a larger tax drag on stocks that are bought and sold within a year than on longer-term holdings. This is to incentivize you to save up, buttercup. The government prefers you invest for the long haul, rather than play the short trade game.