After-tax return
The return left after tax on income and realised gains, the only return a taxable investor can spend. Tax is charged on the nominal return, so inflation is taken out afterwards, not before.
Where you will meet it
After-tax return appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Contrast gross with net, pre-tax with after-tax, and real with nominal returns
“Pre-tax and after-tax differ by the investor's own tax position, so the same fund produces different after-tax returns for different holders.”
- Explain how taxes shape both the choice of asset allocation and the approach to rebalancing
“Taxable investors should optimise on after-tax returns and risk.”
- Contrast how bond portfolios are run for investors who pay tax and for those who do not
“A taxable investor must maximise after-tax return, which changes many decisions: the mix of coupon income versus capital gains; the timing of sales, because deferring gains defers tax and holding periods may qualify gains for lower rates; realising losses to offset gains; and the use of tax-exempt bonds where available.”
- Evaluate the effect of different taxes on individuals and of inflation on their investment decisions
“Inflation erodes purchasing power, and tax is usually charged on the nominal return, so the real after-tax return is lower than it appears.”
Practise it
Practise after-tax return until it is automatic: questions that explain every wrong option.
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