Taxable Investing > Basics > Income and Capital Gains Taxes

An investment typically generates two sources of return: income and capital appreciation.  This creates a before-tax total return decomposition of

rT = rI + rG

rT = before-tax total return
= before-tax income return
= total before-tax capital gains return


On an after-tax basis, this return decomposition yields: 

rAT = (1 - tI )(rI - mf )+ (1 - TtG ) rG

 rAT = after-tax total return
= income tax rate
rI = before-tax income return
mf = management fee
T = turnover
tG = capital gains tax rate
rG = before-tax capital gains return

Note that this after-tax return assumes the cost basis equals the market value.  Additionally, this after-tax return assumes that there is no market value tax.  These assumptions are for introductory purposes. 

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