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Fee & Tax

Fees and taxes represent costs that reduce your portfolio value. They are separate transaction types to distinguish between broker-charged costs and government-imposed obligations.

🔑 Key Properties

Property Fee Tax
Code FEE TAX
Cash effect ⬇️ Decreases balance ⬇️ Decreases balance
Asset effect — —
Examples Commission, custody fee, spread Capital gains tax, withholding tax, stamp duty

📊 Fee Types

Fee Type Description Frequency
Trading commission Per-trade cost charged by broker Per transaction
Custody fee Account maintenance charge Monthly/Quarterly
Spread Difference between bid and ask price Implicit per trade
FX conversion fee Cost of currency exchange Per conversion
Management fee (TER) ETF/Fund annual expense Deducted from NAV

💰 Tax Types

Tax Type Description When Charged
Capital gains tax Tax on realized profit from selling On sale
Withholding tax Tax deducted at source (dividends, interest) On payment
Stamp duty Transaction tax (e.g., UK stamp duty) On purchase
Financial transaction tax Tax on trades (e.g., Italian Tobin tax) On trade

📐 Impact on Returns

Fees and taxes directly reduce your net return. The relationship between gross and net performance:

\[ R_{net} = R_{gross} - \frac{\text{Fees} + \text{Taxes}}{V_{start}} \]

Where:

  • \(R_{gross}\) = return before costs (what the market gave you)
  • \(R_{net}\) = return after costs (what you actually keep)
  • \(V_{start}\) = portfolio value at the start of the period

📉 Compounding Effect of Fees

Over long holding periods, even small recurring fees erode returns significantly due to compounding drag:

\[ V_{final} = V_0 \times (1 + r - f)^n \]

Where:

  • \(V_0\) = initial investment
  • \(r\) = annual gross return rate (e.g., 0.07 for 7%)
  • \(f\) = annual fee rate (e.g., 0.01 for 1%)
  • \(n\) = number of years

The 1% drag over 30 years

With $10,000 invested at 7% gross return:

  • Without fees: $10,000 × \((1.07)^{30}\) = $76,123
  • With 1% fee: $10,000 × \((1.06)^{30}\) = $57,435

The 1% annual fee costs you $18,688 — a 26% reduction in final value.