- Taxes reduce your returns because you pay out cash from your profits which reduces how much money you have available to invest.
- There are at least seven different types of investment taxes: Long-term capital gains, short-term capital gains, qualified dividends, non-qualified dividends, interest income, foreign dividends, and state investment taxes.
- We cover several strategies to reduce your investing taxes, including tax-loss harvesting, owning stocks in tax-advantaged accounts, and more.
There’s a saying in the investment community, “It’s not what you make, it’s what you keep.”
This is referring to the effect that taxes (and also various fees) can have on your returns.
You see, earning strong profits from investing in stocks is great, but it means the tax man will soon be at your door asking for his share.
Investors often forget about the impact of taxes, but they can actually have a large impact on what you make over the long term.
For example, Fidelity shows returns after taxes for the market from 1926 – 2016:
You can see that taxes shave off about 2% per year in returns, which will add up over time.
There are two big reasons why taxes have such a negative impact on long-term returns…