What Investors Need to Know About Taxes

April 29, 2026

When it comes to investing, it's not just about what you earn — it's about what you keep after taxes.

The challenge is that not all investment income is treated the same way by the IRS. Understanding the differences can help you make smarter decisions about what you hold and where you hold it.

Ordinary Income

Interest from savings accounts, money market funds, CDs, and bonds is taxed as ordinary income — meaning it's subject to your marginal tax rate. If you sell a stock, bond, or fund you've held for 12 months or less, the resulting short-term capital gain is also taxed at ordinary income rates. For high-income earners, this can be a significant drag on returns.

One note worth mentioning: income from U.S. Treasury securities is fully taxable at the federal level but exempt from state and local taxes. For investors in high-tax states, that exemption can be meaningful.

Qualified Dividends and Long-Term Capital Gains

Qualified dividends — paid by U.S. corporations and certain foreign companies — are taxed at the more favorable long-term capital gains rates of 0%, 15%, or 20%, depending on your income level. To qualify, you must hold the underlying security for a specific minimum period.

Long-term capital gains apply to investments held more than one year and are subject to those same favorable rates. This is one reason why patient, buy-and-hold investing can be more tax-efficient than frequent trading.

Mutual Funds vs. ETFs

Here's a distinction that catches many investors off guard: even if you don't sell a mutual fund, you may owe taxes on it. Mutual funds are required to distribute realized capital gains to shareholders — which means another investor's decision to sell can trigger a tax bill for you.

Exchange-traded funds (ETFs) are generally more tax-efficient because of a structural advantage that allows large redemptions to occur "in-kind," avoiding taxable sales at the fund level.

Where You Hold Matters as Much as What You Hold

One of the most practical strategies for reducing tax drag is asset location — placing less tax-efficient investments (like bond funds, REITs, or high-turnover strategies) in tax-advantaged accounts such as IRAs or 401(k)s, and holding more tax-efficient assets (like broad equity ETFs) in taxable accounts.

The Bottom Line

Tax awareness is not just for accountants — it's a core part of building wealth. Small adjustments in how and where you hold your investments can compound meaningfully over time.

If you'd like to explore how your current portfolio is positioned from a tax efficiency standpoint, I'm happy to take a look.

This material is for educational purposes only and does not constitute tax or legal advice. Please consult a qualified tax professional regarding your individual circumstances.