Every return you see quoted is a pre-tax number. What reaches you depends on how the investment is taxed, when the tax falls due, and your own tax position.
The variables that matter
- The category of the investment, since different categories are taxed under different rules.
- How long you held it, because holding periods often change the treatment.
- Whether the return arrives as a gain on sale or as a distribution.
- Whether tax falls each year, or only when you actually sell.
Why timing of tax matters so much
An investment taxed only on sale allows the untaxed amount to keep compounding in the meantime. One taxed annually compounds on a smaller base each year. Over a long horizon this difference alone can be material, even between two investments with the same gross return.
The trap worth avoiding
Tax efficiency is a consideration, not an objective. An investment that suits your goal and horizon and attracts some tax is a better outcome than an unsuitable one chosen because it is taxed lightly. The tax tail should not wag the investment dog.