Taxes on investments
When the bill arises, why frequent selling costs you, and why this is not tax advice.
Two moments of taxation
The first is the capital gain: the difference between your selling price and your buying price. It is usually not taxed until you sell.
The second is income: dividends and bond coupons, which are usually taxed in the year you receive them, whether or not you spend them.
The rules, rates, and exemptions differ from country to country and change over time. This page explains the mechanism, not your personal tax bill.
Why frequent selling costs you twice
Every time you sell at a profit, part of that profit leaves as tax and never compounds again.
Two investors with the same gross return over twenty years can end up with noticeably different amounts if one kept buying and selling while the other simply held.
This is a powerful and underrated argument for holding long term: deferring tax is itself a kind of return.
Structure matters
Accumulating funds reinvest dividends inside the fund. In some jurisdictions this defers the tax; in others it does not. It is worth checking for your country.
Tax-advantaged accounts, where they exist, should usually be used before an ordinary account.
And keep records: purchase prices, dates, and currency conversions. Digging them up five years later is far harder than saving them today.
Key terms in this lesson
- Capital gain
- The difference between the selling price and the purchase price of an asset.
- Tax deferral
- Paying tax later, which leaves the full amount to keep compounding.
- Withholding tax
- Tax deducted automatically from foreign dividends before they reach you.
Quick check
Why can holding long term produce more than frequent buying and selling, even with the same gross return?
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