How to Find the After-Tax Return on a Marketable Security
A marketable security is an investment that you can easily buy or sell, such as a stock or bond. Your after-tax return on a marketable security is your total profit as a percentage of the original investment amount after accounting for income taxes. You can calculate this return to help you compare the performance of different investments that are taxed at different rates. An after-tax return might consist of an income portion, a capital gain portion or both, depending on the investment.These portions of your return might be taxed at different rates, which you must factor into your calculation.
Divide the total income you received from a marketable security while you owned it by the price you paid for it to determine your pretax return on the income. Income includes payments you receive, such as dividends from a stock or interest from a bond. For example, assume you bought stock for $10,000 and received $300 in total dividends. Divide $300 by $10,000 to get 0.03, or a 3 percent pretax return on the income.Step 2
Subtract your percentage tax rate on the security’s income from 1. Multiply your result by the pretax return to calculate the after-tax return on the income. In this example, assume you pay a 15 percent tax rate on the income. Subtract 15 percent, or 0.15, from 1 to get 0.85. Multiply 0.85 by 0.03 to get 0.026, or a 2.6 percent after-tax return on the income.Step 3
Subtract the price you paid for the marketable security from the price for which you sold it or plan to sell it. Divide your result by the price you paid for it to determine the pretax return on the capital gain. Continuing with the example, assume you sold the stock for $12,000. Subtract $10,000 from $12,000 to get a $2,000 capital gain. Divide $2,000 by $10,000 to get 0.2, or a 20 percent pretax capital gain return.Step 4
Subtract your percentage capital gain tax rate from 1. Multiply your result by your pretax capital gain return to calculate your after-tax capital gain return. In this example, assume you held the security for less than one year and must pay 33 percent in taxes on capital gains. Subtract 33 percent, or 0.33, from 1 to get 0.67. Multiply 0.67 by 0.2 to get 0.134, or a 13.4 percent after-tax capital gain return.Step 5
Add together the after-tax return on the income and the after-tax capital gain return to determine your total after-tax return on the marketable security. Concluding the example, add 2.6 percent to 13.4 percent to get a 16 percent after-tax return on the marketable security.
- Tax rates on the income and capital gain portions of a marketable security depend on various factors, such as the type of income and the length of time you own an investment. Consult an accountant to figure your tax rates for your particular situation.