Problem

James Welling, a 37-year-old engineer has an appointment to meet you in about an hour. As you are reviewing his accounts, you notice that he is a fairly active trader. He seems to do pretty well with returns that outpace the averages, but you can't help wonder how much he ends up paying each year in capital gains taxes.

As his appointment time approaches, you prepare a short explanation of the way that capital gains taxes may be hurting his net returns and the difference between short-term gains and long-term gains.

Prepare some detailed discussion points that cover the following:

1. How capital gains taxes may be hurting James' net returns.
2. The difference between short-term gains and long-term gains.