Taxable Investing > Details > Actual After-Tax Returns

Actual after-tax returns account for the management fees and taxes without the assumption that market value equals cost basis.


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

rAT = actual after-tax total return

tI = income tax rate

rI = before-tax income return

mf = management fee

T = turnover

tG = capital gains tax rate

rG = before-tax capital gains return

D = return adjustment for selling off market value with unequal cost basis


The deterministic return adjustment, D represents turnover and selling off starting market value for expenditures or portfolio reweighting with unequal market value and cost basis.


In the table to the right the first column has market value equal to cost basis.  The second column has an 80% cost basis so the 50% turnover effects both the Starting Market Value and the Ending Capital Appreciation.  The capital gains tax rate in the second example is the same for explanatory purposes.   Note that decreases in Starting Market Value for expenditures or portfolio reweighting have similar tax impacts on actual after-tax returns.



  MV = CB MV CB  
Before-Tax Income Return 2.5% 2.5%  
Management Fee 50 basis points 50 basis points  
Income Tax Rate 35% 35%  
Before-Tax Capital Gain Return 5.0% 5.0%  
Turnover 50% 50%  
Capital Gains Tax Rate 35% 35%  
Starting Cost Basis $1,000,000 $800,000  
Starting Market Value $1,000,000 $1,000,000  
Ending Capital Appreciation $50,000 $50,000  
Ending Income $25,000 $25,000  
Management Fees ($5,000) ($5,000)  
Income Taxes ($7,000) ($7,000)  
Capital Gains Taxes ($8,750) ($43,750)  
Ending Net $1,054,250 $1,019,250  
Marginal After-Tax Return 5.4% 5.4%  
Actual After-Tax Return 5.4% 1.9%