i What this calculator does
An index fund sets the bar that active trading has to clear, and the bar is higher than its headline return because the two are taxed differently and only one of them costs you hours. This calculator takes the ETF's expected return and fee, the tax each activity attracts, your trading costs and the time you put in, and returns the gross annual return your trading needs to earn to leave you with the same after-tax, after-time result.
The default tax treatment is the SARS position: frequent trading profit is income at your marginal rate, an ETF held for years is a capital gain with 40% of it included. That gap alone can add ten percentage points to the hurdle. Read it with the ETF guide and the tax article.
This calculator is for educational purposes only. Results are estimates and may vary depending on market conditions, spreads, commissions, platform settings, and exchange rates. It should not be considered financial advice.
Three wedges between you and the index
The first wedge is tax. A broad ETF held for years is taxed as a capital gain with 40% inclusion, so at a 36% marginal rate the effective tax is 14.4%; the same rand earned by frequent trading is income taxed at the full 36%. The second wedge is cost: an ETF charges a fraction of a percent a year, while an active trader pays spreads, commissions and overnight swaps that commonly add up to several percent of capital. The third wedge is time, which the ETF does not need and the trader does. The calculator stacks the three and solves for the gross return that makes them disappear.
What a realistic hurdle looks like
At the defaults, R500,000 of capital, 300 hours a year valued at R200, 3% costs and a 36% marginal rate, trading has to earn roughly 35% gross a year to tie with a 10% ETF, and about 16% if you value the hours at nothing. Double the capital and the hurdle falls, because the hours are spread over more money; halve the hours and it falls again. This is why the same strategy can make sense for a large account and no sense for a small one, and why the hourly rate calculator and this one usually agree with each other.
What the model simplifies
It assumes the ETF is sold after one year, so the annual CGT exclusion and the benefit of deferring the gain for a decade are ignored; both make the ETF look better than shown. It assumes trading profit is taxed as income, which is the SARS position for frequent trading; a genuinely long-term trader might be taxed as an investor and should set the two rates closer together. And it treats time at one rate, when the first hundred hours of a year cost more than the last. None of these change the direction of the answer, only the size of the number.
Spotted an outdated figure? If a rate, limit or formula in this calculator no longer matches its source, email us the page and the source. A material correction is dated on the Updates Log.
Frequently asked questions
Why is trading taxed as income and the ETF as a capital gain?
SARS looks at intention and frequency. Profit from frequent, short-term trading is revenue and taxed at your marginal rate; gains on an investment held for the long term are capital, with 40% of the gain included in income for an individual.
Should I value my time at my salary rate?
If the hours could be worked instead, yes. If they come out of leisure, use the rate at which you would sell that leisure, which is rarely zero. Entering zero gives the "ignoring your time" hurdle, which is shown as well.
Why does a bigger account lower the hurdle?
Because your time is a fixed cost. R125,000 of hours spread over R200,000 is 62% of capital; the same hours over R2 million is 6%. Trading rewards scale, which is one reason retail traders with small accounts rarely beat the index after everything is counted.
My trading costs are lower than 4%. What should I enter?
Your own: total spreads, commissions, swaps, data and platform fees for a year divided by your average capital. Frequent forex trading at retail spreads often exceeds 4%; a few position trades a year can be well under 1%.
Does the ETF figure include dividends?
The expected return you enter should. The 10% default is a long-run total return for a broad equity index, roughly 7% price growth plus 3% dividends.
What if my trading beats the hurdle?
Then, after everything, it is worth more than the index to you, provided the return is measured over a full year of live results and not a strong quarter. The luck or skill calculator asks whether the result is statistically real.
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