Lesson 8 of 10 · All lessons in this module
- Financial assets, yields and expected versus actual returns
- What an interest rate is made of
- Required return, risk premia and excess returns
- Holding period return
- Arithmetic and geometric mean returns
- Annualised and continuously compounded returnsVideo lesson
- Gross, net, after-tax, real and leveraged returnsVideo lesson
- Taxing price and income returns
- Leverage through call options
- Integrated cases: from total return to what the investor keeps
This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 8 of 10 · 12 min
Taxing price and income returns
Price gains and cash distributions are often taxed at different rates, and only when realised, so the after-tax return depends on how the return was earned and when gains are taken.
In short
- Capital gains tax applies to realised price gains: . Distributions (dividends, interest) are usually taxed as income at a different rate.
- After-tax nominal return: .
- Realised losses can often be offset against realised gains; long-term gains often get a lower rate than short-term gains.
- An investor who does not sell pays tax only on distributions that year; the gain stays untaxed until realised.
- To cut the tax bill: choose tax-favoured investments, keep turnover low and defer realising gains.
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