See how taxes reduce your investment return. Enter nominal return, dividend yield, and tax rates on dividends and capital gains—get after-tax return and optional FV impact.
Tax Drag on Investment Returns
See how taxes reduce your investment return. Enter nominal return, dividend yield, and tax rates on dividends and capital gains. Get after-tax return and optional future value impact.
Understanding Tax Drag
How taxes reduce your effective return
Nominal return
The stated or headline return (e.g. 7% per year). Before taxes. In a taxable account, you don't keep all of it—dividends and realized gains are taxed.
What you see in performance reports and fund fact sheets.
Taxable accounts: nominal return is reduced by tax drag.
Tax-advantaged (IRA, 401k): no drag until withdrawal.
Use after-tax return for taxable account planning.
Tax drag
The percentage points of return lost to taxes each year. Tax drag = (Dividend yield × Tax on dividends) + (Capital gain component × Tax on cap gains). After-tax return = Nominal − Tax drag.
Higher dividend yield → more taxed yearly → higher drag.
Higher tax rates → higher drag.
Over decades, drag compounds into a large FV difference.
Dividends are assumed taxed each year at your dividend tax rate. The remainder of the return (capital gain component) is assumed taxed at your capital gain rate—in practice, unrealized gains are not taxed until sale, so this is a simplified annual drag.
Over long horizons, the after-tax return compounds; the difference between nominal and after-tax FV grows. Use this calculator to see the dollar impact of tax drag and to compare taxable vs tax-advantaged placement.
Tax Drag on Investment Returns: How Taxes Reduce Your Effective Return
In a taxable account, you don't keep the full nominal return—you pay tax on dividends and, when realized, on capital gains. Tax drag is the reduction in your return due to those taxes. This calculator shows your annual tax drag and after-tax return, and optionally the future value impact over time.
Tax drag is the percentage of your return that is lost to taxes each year. In a taxable account, dividends are typically taxed when paid, and capital gains when realized. So your effective (after-tax) return is lower than the nominal (pre-tax) return. The difference is the tax drag.
Dividends vs Capital Gains
Dividends are usually taxed in the year received (at ordinary or qualified dividend rates). Capital gains are taxed when you sell. This calculator uses a simplified model: it applies the capital gain tax rate to the "capital gain component" of return (nominal return minus dividend yield) each year to approximate annual drag. In reality, unrealized gains are not taxed until sale.
How It Is Calculated
Tax drag = (Dividend yield × Tax rate on dividends) + (Capital gain component × Tax rate on capital gains). Capital gain component = max(0, Nominal return − Dividend yield). After-tax return = Nominal return − Tax drag. If you enter years and initial amount, FV after-tax = Initial × (1 + After-tax return)^years.
Why It Matters
Over long horizons, even a 1% annual tax drag compounds into a large difference in future value. Holding tax-inefficient investments (e.g. high-dividend, high-turnover) in taxable accounts increases drag. Use tax-advantaged accounts (IRA, 401k) for bonds and high-dividend stocks when possible, and taxable for tax-efficient growth.
Using This Calculator
Enter nominal return (%), dividend yield (%), tax rate on dividends (%), and tax rate on capital gains (%). Optionally enter years and initial amount to see FV with and without tax drag. Use your marginal rates (federal + state if applicable). For qualified dividends, use your long-term capital gain rate for dividend tax.
What to Enter
Nominal return = expected total return (e.g. 7% for a diversified portfolio). Dividend yield = annual dividend yield (e.g. 2%). Tax on dividends = your rate on dividend income (ordinary or qualified). Tax on cap gains = your long-term capital gain rate. Add state tax to both if you want total drag.
Conclusion
Tax drag reduces your effective return in taxable accounts. This calculator shows the annual drag and after-tax return, and optionally the future value impact. Use it to see how much taxes cost you over time and to justify tax-advantaged account placement and tax-efficient fund selection.
Pair it with the Long-Term vs Short-Term Capital Gain Comparison calculator for one-time sale tax, and with tax-equivalent yield for bond comparisons.
In summary: tax drag reduces your effective return in taxable accounts. This calculator shows the annual drag and after-tax return, and optionally the future value impact, so you can see how much taxes cost you over time and justify tax-advantaged placement.
Frequently Asked Questions
Common questions about tax drag
What is tax drag?
The reduction in your investment return due to taxes on dividends and capital gains. Tax drag (in percentage points) is the amount by which your after-tax return is lower than your nominal return each year.
How is it calculated?
Tax drag = (Dividend yield × Tax on dividends) + (Capital gain component × Tax on cap gains). Capital gain component = nominal return − dividend yield (if positive). After-tax return = Nominal − Tax drag.
Why use capital gain tax for the growth part?
The part of return that is not dividends is assumed to be capital appreciation. When realized (we assume annually for simplicity), it is taxed at the capital gain rate. In practice, unrealized gains are not taxed until sale—this calculator gives an approximate annual drag.
What if my dividends are qualified?
Qualified dividends are taxed at long-term capital gain rates. Use your long-term cap gain rate for "tax rate on dividends" in that case. Non-qualified dividends use your ordinary income rate.
Does this apply to IRA and 401(k)?
No. In tax-advantaged accounts, growth is not taxed until withdrawal. Tax drag applies to taxable accounts. Use this calculator to see the cost of holding the same investment in a taxable account vs tax-advantaged.
What rate should I use for dividends?
Your marginal tax rate on dividend income—ordinary rate for non-qualified dividends, or long-term capital gain rate (0%, 15%, 20%) for qualified dividends. Add state tax if applicable.
How does tax drag compound?
Each year you earn the after-tax return, not the nominal return. So FV after-tax = Initial × (1 + after-tax return)^years. The gap between nominal FV and after-tax FV grows with time.
How do I reduce tax drag?
Hold tax-inefficient investments (bonds, high-dividend stocks) in IRA/401k when possible. Use taxable accounts for tax-efficient holdings (growth stocks, index funds with low turnover and low dividends). Tax-loss harvesting can also help.
How does this relate to long-term vs short-term capital gain?
Tax drag is about ongoing taxes on returns (dividends and assumed annual realization of gains). Long-term vs short-term is about the one-time tax when you sell. Use both: tax drag for multi-year impact in taxable accounts; long-term vs short-term for sale timing.
Who should use this calculator?
Anyone with taxable investments who wants to see how much taxes reduce their effective return and future value. Advisors and educators can use it to show the benefit of tax-advantaged accounts and tax-efficient placement.
What if my dividend yield is higher than my nominal return?
Then the capital gain component is zero (we use max(0, nominal − dividend yield)). Tax drag = dividend yield × tax on dividends only. That can happen in high-dividend, low-growth scenarios (e.g. some bond funds or REITs).
Usage of this Calculator
Practical applications
Who Should Use This Calculator?
Taxable Account InvestorsTo see how much taxes reduce your effective return and FV over time.
Advisors & EducatorsTo show clients the benefit of tax-advantaged accounts and tax-efficient fund placement.
Asset Location PlannersTo compare drag for different investments and to decide what to hold in taxable vs IRA/401k.
Retirement & Long-Term SaversTo quantify the cost of holding the same investment in taxable vs tax-advantaged over decades.
Limitations
Annual realization: Capital gain component is assumed taxed annually; unrealized gains are not taxed until sale, so actual drag may be lower for buy-and-hold.
Constant rates: Assumes same return and tax rates each year; actual rates and returns vary.
No state/NIIT: Add state tax and NIIT to your rates for total drag if applicable.
Single investment: For a portfolio, use a weighted average nominal return and dividend yield, and your blended tax rates.
This calculator shows how taxes reduce your investment return (tax drag) and your after-tax return. You enter nominal return, dividend yield, tax rate on dividends, and tax rate on capital gains; optionally years and initial amount to see FV impact. Use it to see the dollar cost of tax drag over time and to justify tax-advantaged account placement and tax-efficient fund selection. Pair it with the Long-Term vs Short-Term Capital Gain Comparison calculator for one-time sale tax.
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See how taxes reduce your investment return. Enter nominal return, dividend yield, and tax rates on dividends and capital gains—get after-tax return and optional FV impact.
How to use Tax Drag on Investment Returns Calculator
Step-by-step guide to using the Tax Drag on Investment Returns Calculator:
Enter your values. Input the required values in the calculator form
Calculate. The calculator will automatically compute and display your results
Review results. Review the calculated results and any additional information provided
Frequently asked questions
How do I use the Tax Drag on Investment Returns Calculator?
Simply enter your values in the input fields and the calculator will automatically compute the results. The Tax Drag on Investment Returns Calculator is designed to be user-friendly and provide instant calculations.
Is the Tax Drag on Investment Returns Calculator free to use?
Yes, the Tax Drag on Investment Returns Calculator is completely free to use. No registration or payment is required.
Can I use this calculator on mobile devices?
Yes, the Tax Drag on Investment Returns Calculator is fully responsive and works perfectly on mobile phones, tablets, and desktop computers.
Are the results from Tax Drag on Investment Returns Calculator accurate?
Yes, our calculators use standard formulas and are regularly tested for accuracy. However, results should be used for informational purposes and not as a substitute for professional advice.