Investment Tax Drag Calculator
Enter a taxable portfolio, cost basis, contribution plan, return assumptions, and tax rates. The calculator compares the after-tax result with a no-tax benchmark and shows the annualized drag.
Total tax drag$23,730.43
- Ending value before liquidation tax
- $265,165.74
- Ending cost basis
- $173,782.52
- Unrealized gain at liquidation
- $91,383.22
- Estimated liquidation tax
- $13,707.48
- Spendable value after liquidation
- $251,458.26
- No-tax benchmark value
- $275,188.69
- Cumulative annual distribution taxes
- $7,719.35
- Annualized after-tax return
- 5.67%
- Annualized tax drag
- 1.13%
Year by year
| Year | Annual distribution taxes | Ending value | Ending cost basis | No-tax benchmark |
|---|---|---|---|---|
| 1 | $465.00 | $112,335.00 | $88,035.00 | $112,800.00 |
| 2 | $522.36 | $125,451.42 | $96,321.02 | $126,470.40 |
| 3 | $583.35 | $139,398.77 | $104,873.95 | $141,070.39 |
| 4 | $648.20 | $154,229.68 | $113,710.72 | $156,663.17 |
| 5 | $717.17 | $170,000.13 | $122,849.29 | $173,316.27 |
| 6 | $790.50 | $186,769.64 | $132,308.80 | $191,101.78 |
| 7 | $868.48 | $204,601.50 | $142,109.56 | $210,096.70 |
| 8 | $951.40 | $223,563.00 | $152,273.20 | $230,383.27 |
| 9 | $1,039.57 | $243,725.72 | $162,822.71 | $252,049.33 |
| 10 | $1,133.32 | $265,165.74 | $173,782.52 | $275,188.69 |
Assumes contributions are made at each year-end and have no return during that same year.
Annualized returns are money-weighted using the starting value, end-of-year contributions, and ending value.
How to use this calculator
- Enter the current market value and cost basis of the taxable account.
- Add the annual contribution and the number of complete years to model.
- Enter the expected total return, investment fee, distribution yields, and tax rates.
- Read the spendable value, total tax drag, and year-by-year tax and basis schedule.
How the tax drag is calculated
This calculator models a taxable investment account one year at a time. It starts with the current market value and cost basis, then applies the expected total return, annual fee, taxes on taxable distributions, reinvestment of after-tax distributions, and year-end contributions.
Let V0 be the current value, K0 the current cost basis, C the year-end contribution, n the number of years, r the annual total return, and f the annual fee. Let yo and yq be the ordinary and qualified distribution yields, with tax rates to and tq. In each year, annual distribution tax is:
Tt = V(t-1) × (yo × to + yq × tq)
The taxable account value after fees, annual tax drag, and the year-end contribution is:
Vt = V(t-1) × (1 + r - f - yo × to - yq × tq) + C
The basis rises by contributions and by the distributions that were taxed and reinvested after tax:
Kt = K(t-1) + V(t-1) × [yo × (1 - to) + yq × (1 - tq)] + C
The no-tax benchmark uses the same starting value, return, fee, and contributions, but removes annual taxes and liquidation tax: Bt = B(t-1) × (1 + r - f) + C. At the end, unrealized gain is max(Vn - Kn, 0). Liquidation tax equals that gain times the liquidation tax rate, and spendable value is the ending value less that tax.
What moves the result most
The largest drivers are the distribution yields, tax rates, return assumption, and starting unrealized gain. High ordinary-income yield can create tax drag every year, while a high cost basis can reduce or eliminate the tax modeled at liquidation. Fees matter because both the taxable account and the benchmark compound after the fee, so a higher fee lowers both ending values before tax differences are measured.
Total tax drag is usually larger than the sum of taxes paid. Taxes removed early no longer compound, so the drag includes both the checks paid to tax authorities and the growth those dollars would have produced inside the benchmark.
What this leaves out
The model uses constant annual returns, yields, fees, and tax rates. It does not determine your tax bracket, qualified-dividend eligibility, holding period, or state treatment. It also leaves out return-of-capital distributions, tax-loss harvesting, wash sales, tax-lot selection, credits, deductions, carryovers, inflation, account contribution limits, and year-by-year market volatility.
Worked example
Suppose a taxable account is worth $100,000 with $80,000 of cost basis. You add $6,000 at the end of each year for 10 years, expect a 7% total return, pay a 0.2% annual investment fee, receive a 1% ordinary-income yield taxed at 24%, and receive a 1.5% qualified distribution yield taxed at 15%. You assume any remaining gain is taxed at 15% when the account is sold.
The modeled account ends at $265,166 before liquidation tax, with $173,783 of cost basis. The remaining unrealized gain is $91,383, so estimated liquidation tax is $13,707 and spendable value is $251,458.
The no-tax benchmark reaches $275,189. Cumulative annual distribution taxes are $7,719, but total tax drag is $23,730 because the result also includes liquidation tax and the foregone growth on taxes paid earlier. The after-tax money-weighted return is about 5.67%, compared with a 6.80% benchmark return, for annualized tax drag of about 1.13 percentage points.
Common questions
What is tax drag on an investment portfolio?
Tax drag is the reduction in ending wealth caused by taxes on investment income, realized gains, and any gain taxed when the account is liquidated. This calculator measures it by comparing a taxable projection with a benchmark that uses the same return, fee, and contributions but no taxes.
Why does cost basis affect the result?
Cost basis is the portion of the account that has already been invested or taxed. A higher basis leaves less unrealized gain to tax when the account is sold. If basis is greater than the ending value, the model shows no liquidation tax.
How are reinvested dividends treated?
The calculator treats ordinary and qualified distributions as taxable in the year they occur. It subtracts the tax, assumes the after-tax distribution is reinvested, and adds that reinvested after-tax amount to cost basis.
What is the difference between ordinary and qualified distributions?
Ordinary distributions include items such as interest and nonqualified dividends that are often taxed at ordinary income rates. Qualified dividends and long-term capital-gain distributions may be taxed at a different rate, so the calculator lets you enter a separate yield and tax rate for them.
Why is total tax drag larger than the taxes paid?
Annual taxes reduce the amount left invested. Total tax drag includes the tax dollars paid, liquidation tax, and the growth those tax dollars would have earned in the no-tax benchmark.
How should state taxes and the net investment income tax be included?
Enter combined rates that reflect the scenario you want to test. For example, the ordinary distribution tax rate can include federal marginal tax, state income tax, and any applicable net investment income tax if you want those taxes included in the projection.