Not all capital gains are created equal: short-term gains can cost twice as much as long-term ones. Mechanism: The tax system distinguishes between holding periods. Short-term gains are taxed as ordinary income; long-term gains get a preferential rate. That difference can turn a mediocre pre-tax strategy into a losing after-tax strategy if turnover is too high. Market translation: A fund that turns over 100% annually may lose 1-2% per year to excess taxes compared to a similar exposure with lower turnover. Failure mode: The mistake is comparing strategies on pre-tax returns without adjusting for the tax drag created by each strategy's turnover. Review question: Before sizing up, identify whether the edge comes from cash flow, volatility, timing or balance-sheet structure. A lot of confusion disappears once you separate the headline from the mechanism.