🧾What tax does to your return

Four points of attack, one mixture per country

There are exactly four things a government can take when you invest. The capital gain you make. The income it throws off, like dividends and interest. The wealth you hold, whether or not it earned anything. And the act itself, through a tax on every buy and sell.

Almost every country uses a mixture of two or three of these, and that mixture fully determines which behaviour is expensive and which is cheap. Where the gain is taxed, deferring pays. Where the transaction is taxed, sitting still pays. Where the holding is taxed, you pay in a losing year too. So the first question isn't 'how much' but 'on what'.

Withholding tax: the levy you never see

Buy a share or fund from another country and that country often deducts tax on the dividend before it ever reaches you. It's called withholding tax, and you usually won't see it on your statement: you simply receive less. Treaties between countries determine how much you can reclaim or offset, and how much sticks also depends on where your fund is domiciled. Two ETFs tracking exactly the same index can differ by tens of basis points a year because of this — often more than the difference in management fees everyone does look at.

Distributing or accumulating

Almost every major index comes in two versions: one that pays dividends out and one that reinvests them automatically. Which is better for you follows directly from the mixture above. If your country taxes the payout, accumulating is generally better, because there's no moment for the tax office to hook into. If your country taxes the holding, it makes little tax difference and you choose on practical grounds. It's a decision you make once that compounds for twenty years, which is exactly why it's worth getting right once.

Stocky says

With any ETF, compare the accumulating and distributing versions in your own situation. The difference in net return over twenty years is often bigger than the difference between most funds.

The tax-advantaged wrapper

Practically every country has one or more accounts where investing is treated more kindly: a pension account, an exempt savings plan, a scheme through your employer. The rule is nearly always the same: use that room first, because it's capped per year and can't be caught up later.

But always read the price attached, and it's usually the same two things: the money is locked until a certain age, and your choice of investments is restricted. For anyone who might need the money sooner, an ordinary account with more freedom is sometimes the better deal, even though it's less tax-efficient.

Why there are no rates here

Exemptions, percentages and thresholds change almost every year, and sometimes a country changes its entire system. A lesson that names the number will be wrong in twelve months while still looking authoritative, and that's worse than no lesson. What rarely changes are the four points of attack and what they do to your behaviour.

Remember those, look the current figures up at your own tax authority when you need them, and for large amounts talk to someone who does this for a living and knows your situation. And one thing holds in every system: trading less is the only dial that's guaranteed to work.