May 19, 2022

Corporations deliver returns investors in the form of dividends—qualified and non-qualified-- and or capital gains—long and short term. Each of these vehicles is subject to different tax treatments. The long-term capital gains are taxed at a preferential tax rate and the gains compound tax free. The qualified dividends are also taxed at the preferential rate, but unlike the capital gains the dividends are subjected to personal income tax rates before the proceeds can be reinvested. Finally non-qualified dividend and short-term capital gains are taxed at the personal income tax rate. Given the differences in tax treatment, it is apparent that when the before tax rate of return generated by each of these vehicles is the same, the after-tax return will not be. Investors are care about their after-tax returns, yet for a variety of reasons money managers’ report their performance on a gross of tax basis. Hence when making a choice, the investors must make a calculation converting the investment or manager performance to an after-tax performance. Only then a meaningful comparison across vehicles and investment managers can be made.

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