Taxes for Investors

What creates a taxable event

In a taxable account, tax generally follows an event rather than a paper gain.

• Selling at a gain realises a capital gain
• Dividends and interest are generally taxable when received
• Fund distributions can be taxable even if you did not sell
• Unrealised gains on something you still hold are generally not taxed

Holding period

In the U.S., gains on assets held beyond one year are generally taxed at long-term capital gains rates, which are typically lower than short-term rates that apply to shorter holdings.

This is one more structural reason frequent trading is expensive: the tax treatment itself is worse.

Cost basis and records

Cost basis is generally what you paid for a holding, including purchase costs such as commissions. Adjusted basis is that figure after later changes the IRS recognises — for example, a stock split spreads the same basis across more shares. The taxable gain on a sale is the sale proceeds minus adjusted basis.

Each reinvested dividend buys a new lot with its own basis and date. Simplified U.S. example (hypothetical): you buy 10 shares for $1,000 plus a $5 commission (basis $1,005), then a $40 dividend — taxed that year — buys 0.4 shares (basis $40). Total basis is $1,045. Selling everything for $1,300 gives a $255 gain, not $300; forgetting the reinvested lot would mean paying tax twice on the $40.

Gifts and inherited assets follow different basis rules (for example, inherited property generally uses its value at the date of death). Check the IRS rules or a professional for those cases.

Not tax advice

Rules vary by country, change over time and depend on your circumstances. Consult a qualified tax professional.