# Taxes & Account Types — What You Actually Keep

> Every other lesson stops at the pre-tax number. This one is about the number that lands in your account. You'll learn how the United States taxes a stock investor — the holding-period line between short- and long-term gains, the wash-sale trap, which dividends get the good rate, how to choose which shares you sell, how to harvest a loss without losing the exposure, and which account each asset belongs in. Then a full section for non-US investors, whose rules are different in almost every respect: withholding at source, the treaty question, how gains are treated, an estate-tax exposure that starts far lower than most people expect, and the Irish-fund route many use instead.

> ⚠️ **Read this first.** This lesson is an educational illustration of how the rules *generally* work, for a stated tax year. Brackets and thresholds are indexed and change; rules get amended; your facts (filing status, state, residency, other income, treaty position) change the answer. Nothing here is a filing position or tax advice — confirm with a qualified tax professional before acting.

**What you'll learn**

- Why the after-tax return is the only one you can spend — and how much tax can move it
- Short-term vs. long-term gains, and why "wait N days" is sometimes the best trade
- The wash-sale window (61 days, across all your accounts, including reinvested dividends)
- Which dividends are "qualified" and the holding-period test that decides it
- Cost basis, tax lots, and why *which* shares you sell is a decision, not an accident
- Tax-loss harvesting done right, and where each asset belongs (taxable vs. IRA vs. Roth)
- For non-US investors: W-8BEN, withholding and treaties, how gains are treated, the $60,000 estate-tax cliff, and the UCITS alternative

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## Why the after-tax number is the number

Two investors buy the same stock at $100 and sell at $130 a year later. One held it for 366 days; the other for 364. Same business, same price, same 30% gain. At a common bracket, one pays roughly 15% on the gain and keeps about $25.50 of it; the other pays ordinary rates — say 24% — and keeps about $22.80. Two days changed the after-tax result by more than 10% *(illustrative, rounded)*.

That is the whole lesson in miniature: **tax is a cost like any other, and unlike most costs it is partly under your control** — through timing, through which shares you sell, and through where you hold each asset. The pre-tax return is the market's; the after-tax return is yours.

> **Key idea:** You cannot control the market's return. You *can* control a meaningful slice of the tax on it. Ignoring that slice is leaving money on the table for no risk.

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## Part I — US persons

### Short-term vs. long-term: the one-year line

The US taxes **capital gains** — the profit when you sell for more than you paid — at two very different rates depending on how long you held:

| Holding period | Called | Taxed at |
|---|---|---|
| **One year or less** | Short-term gain | Your ordinary income rate — the same bracket as your salary |
| **More than one year** | Long-term gain | Preferential brackets — generally 0%, 15%, or 20% depending on taxable income |

The clock starts the day *after* you buy and includes the day you sell. Above an income threshold, an **additional 3.8%** net investment income tax applies to investment income on top of either rate.

**"Wait N days" is the cheapest tax strategy there is.** If a lot is a few weeks from turning long-term, compute two things: the tax saved by waiting, and the price fall that would wipe that saving out. Then you are weighing a real number against a real risk instead of ignoring one of them. For a $3,000 gain moving from a 24% bracket to 15%, the saving is $270 — the stock would have to fall about 2.7% on a $10,000 position for waiting to cost more than it saves *(illustrative)*.

### Netting, and the annual loss limit

Losses offset gains: short-term losses net against short-term gains first, long-term against long-term, then the two nets are combined. If you end the year with a **net capital loss**, up to **$3,000** of it ($1,500 if married filing separately) can offset ordinary income; anything beyond that **carries forward indefinitely** to future years. A loss is never wasted — but it can be *deferred*, which is why timing losses to years with gains is worth doing.

### The wash-sale rule

You sell a stock at a loss, then buy it back a week later because you still like it. The loss is **disallowed** — the IRS treats you as never having really sold.

The rule, in general terms: a loss is disallowed if you buy the **same or a "substantially identical" security within 30 days before or after** the sale — a **61-day window** counting the sale date. Three things make it bite harder than people expect:

- **It applies across all your accounts**, including an IRA. Rebuying inside an IRA is the worst case: the disallowed loss has nowhere to go and is permanently lost.
- **Reinvested dividends count as purchases.** A DRIP that reinvests a dividend inside the window washes part of the loss — the classic accidental wash.
- **Substantially identical** means the same ticker, options on it, or securities convertible into it. A different company in the same industry is not. Two index funds tracking the *same* index are unsettled territory that conservative practice avoids; two funds tracking *different* indexes are the common harvesting swap.

The loss is not gone — it is **added to the cost basis** of the replacement shares, and the holding period carries over. But it is deferred, and if the replacement is in an IRA, deferred forever. Gains are never washed.

> **Key idea:** Before selling anything at a loss, draw the 61-day window and mark every purchase in it — DRIP, planned rungs, options assignments, other accounts. Then turn the DRIP off or move the purchase outside the window.

### Qualified dividends

Dividends come in two tax flavors:

| Type | Taxed at | Typical payers |
|---|---|---|
| **Qualified** | Long-term capital-gains rates | Most US corporations and qualified foreign companies |
| **Ordinary (non-qualified)** | Your ordinary income rate | REITs (mostly), bond and money-market funds, most partnerships |

Even a qualified payer's dividend is only qualified for *you* if you pass the holding-period test: you must hold the shares for **more than 60 days during the 121-day period that begins 60 days before the ex-dividend date**. Buy just before the ex-date and sell just after to "capture" the dividend, and you get the ordinary rate *and* usually a price drop equal to the dividend. Heavily hedged shares can fail the test too. REIT ordinary dividends are generally not qualified, though they may qualify for a separate 20% deduction.

### Cost basis and tax lots: choose which shares you sell

Every purchase creates a **tax lot** with its own date and cost. When you sell part of a position, *which* lot you sell decides the gain and its character:

| Method | What it does | When it helps |
|---|---|---|
| **FIFO** (most brokers' default) | Sells the oldest shares first | Rarely what you want in a rising stock — it realizes the biggest gains |
| **Specific identification** | You name the lots | Almost always — pick the character and size of gain or loss you want |
| **Highest cost first (HIFO)** | Sells the most expensive lot | Minimizes today's gain or maximizes a harvested loss — but check the character |
| **Lowest cost first** | Sells the cheapest lot | Deliberately realizing gains in a 0% bracket year |

The catch: specific identification must be **designated at or before the trade**, in whatever form your broker accepts. You cannot pick the lot after the fact. Make "which lot?" part of your trade ticket.

### Tax-loss harvesting

**Harvesting** means selling a position at a loss to realize it for tax purposes, while keeping the market exposure through a *similar but not substantially identical* replacement for at least 31 days. A short-term loss is worth the most when it offsets short-term gains or ordinary income.

Three honest caveats: the replacement will track the original imperfectly (say what that costs); harvesting **lowers your basis**, so the tax is deferred, not eliminated — unless you hold until a step-up or donate the shares; and the 31-day swap-back is itself a taxable event. Harvest when the loss is material (a floor like the larger of $500 or 5% of the lot keeps you from churning) and when you have gains to offset — or a future year you can plan for.

### Which account for which asset

Tax-advantaged accounts change the math entirely. A **traditional IRA / 401(k)** defers tax until withdrawal (taxed then as ordinary income); a **Roth** is funded with after-tax money and grows tax-free. The placement logic *(general)*:

| Asset behaviour | Taxable | Traditional IRA / 401(k) | Roth |
|---|---|---|---|
| Broad, low-turnover equity index; stocks held for years | ✅ best — long-term rates, harvesting, step-up at death | fine | fine |
| Bonds, REITs, high-yield, high-turnover active funds | ✗ ordinary income every year | ✅ | ✅ |
| The holdings you expect to grow most | ok | ok | ✅ best — the growth is never taxed |
| Foreign equity funds that withhold tax | ✅ — the foreign tax credit is only usable here | ✗ credit lost | ✗ credit lost |

At year-end your broker reports it all on **Form 1099** (1099-B for sales, 1099-DIV for dividends) — the document you reconcile your own records against.

*In the plugin:* `tax-lens` runs this whole part on your own lots — Trade mode for one sale, Position mode for one holding, Portfolio mode for placement and annual **tax drag**; `position-ladder` times its rungs against the wash window; `dividend-analysis` reports the gross yield, `tax-lens` turns it into the after-tax one.

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## Part II — Non-US investors

If you live outside the United States and buy US stocks through a US or international broker, almost none of Part I applies to you, and a different set of rules does — rules that US-centric content almost never mentions. This section covers the **US side only**; your country of residence taxes the same income under its own rules, and that is a question for a local professional.

### W-8BEN: the form that sets your rate

**Form W-8BEN** certifies to your broker that you are not a US person and claims any treaty rate you are entitled to. It is generally valid until the **end of the third calendar year after you sign it** — an expired form means the broker withholds at the full statutory rate, and may apply backup withholding. Put the expiry year in your calendar. At year-end you receive **Form 1042-S**, the statement of US-source income and tax withheld — often the document your home-country return needs.

### Dividends: withholding at source, and the treaty question

US-source dividends paid to a non-resident are withheld at **30%** by the broker or paying agent before the cash reaches you. That rate is reduced **only** if your country of residence has an income-tax treaty with the US *and* you have claimed it on a valid W-8BEN — many treaties bring it to 15%, some lower.

**Taiwan, Hong Kong, and Singapore have no US income-tax treaty, so 30% applies.** Check your own country's status rather than assuming.

The headline number is the **after-withholding yield** *(illustrative)*:

| Gross dividend yield | At 30% (no treaty) | At 15% (typical treaty) |
|---|---|---|
| 3.0% | **2.1%** | **2.55%** |
| 1.3% (a broad US index fund) | 0.9% | 1.1% |

`dividend-analysis` reports the gross figure; the withholding line is what you actually receive. Interest on Treasuries and most corporate bonds is generally **exempt** from withholding (the "portfolio interest" exemption). Fund distributions are more complex — capital-gain and return-of-capital distributions are treated differently from ordinary dividends; reconcile against the 1042-S rather than assume.

### Capital gains: generally not taxed by the US — with conditions

For a non-resident alien, gains on US stocks are **generally not taxed by the United States**. The general condition is that you were **not present in the US for 183 days or more** during the tax year and the gain is not connected to a US trade or business. The exceptions matter: gains that are *effectively connected* with a US business, and gains on **US real property interests** — including certain REITs — under FIRPTA, which are taxed and often withheld.

Two consequences follow. First, **your home country's tax on the gain is the one that actually applies** — the US side being zero does not make the gain tax-free. Second, the entire tax-loss-harvesting logic of Part I is irrelevant to your US position: you cannot offset a US tax you do not owe. Whether harvesting matters for your home-country return is a local question.

### The estate-tax cliff at $60,000

This is the rule most non-US investors have never heard of, and the one with the largest tail.

US-situs assets held by a non-resident are subject to **US estate tax** on death. **US-domiciled stocks and US-domiciled ETFs count as US-situs.** US Treasury bonds, bank deposits, and shares of non-US companies (including ADRs of foreign issuers) generally do not. The exemption for non-residents is only **$60,000** — not the multi-million-dollar exemption US persons have — and the rates climb to **40%**, unless an estate-tax treaty provides otherwise. Only a minority of countries have one; **Taiwan, Hong Kong, and Singapore do not.**

A non-resident holding $220,000 of US-listed stocks and ETFs has $160,000 above the exemption *(illustrative)*. Brokers may also freeze the account until a US estate-tax clearance is obtained. The two standard mitigations are holding the same exposure through **non-US-domiciled funds** (next section) or estate-planning structures that are entirely a professional's domain.

### The Irish-domiciled UCITS route

Many non-US investors hold US stocks through **Irish-domiciled UCITS ETFs** — the same S&P 500 or total-market exposure, listed in London, Amsterdam, or Frankfurt. The trade-offs *(general)*:

| Dimension | US-domiciled ETF | Irish-domiciled UCITS ETF (same index) |
|---|---|---|
| Dividend withholding | 30% (or treaty rate) at your level | **15% at the fund level** under the US–Ireland treaty; no further Irish withholding for non-Irish holders |
| Accumulating share class | Not available — US funds must distribute | Available — dividends reinvested inside the fund (whether your home country taxes the notional income is a local question) |
| US estate tax | US-situs — exposed above $60,000 | **Not US-situs** — outside the US estate-tax net |
| Expense ratio and spread | Usually lower TER, tighter spreads, deepest liquidity | Typically a few basis points higher TER and wider spreads; the largest funds are liquid, many are not |
| After-tax tracking | Benchmark | For a no-treaty investor, 15% fund-level withholding beats 30% at your level — the UCITS fund often **wins after tax despite the higher fee** |
| Access | Any broker | Needs a broker with European exchange access; US brokers generally will not sell them |

One hard rule: **US persons must not buy UCITS funds** — for them these are PFICs with punitive tax treatment. The route is for non-US investors only.

*In the plugin:* `tax-lens --non-us <country>` runs this whole section on your holdings — W-8BEN status, treaty or no-treaty rate, the capital-gains conditions, your US-situs total against the $60,000 line, and the US-ETF vs. UCITS arithmetic; `etf-analysis` compares the funds themselves.

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## Your first-year checklist

**If you are a US person:**

1. Decide the account *before* the asset: broad equity index in taxable, bonds and REITs in the IRA or 401(k), your highest-conviction growth in the Roth.
2. Turn DRIP off in any taxable position you might sell at a loss — or accept that it can wash.
3. Set your broker's default lot method to specific identification and name the lot on every partial sale.
4. Before any sale, check the calendar: days to long-term, and any purchase inside the 61-day window.
5. In December, list unrealized losses above your materiality floor, pair each with a non-identical replacement, and harvest what offsets this year's gains.
6. Keep every 1099 and your own lot records; reconcile them.

**If you are a non-US investor:**

1. Sign W-8BEN before your first dividend; write the expiry year in your calendar.
2. Look up whether your country has a US income-tax treaty. If not, budget for 30% on every dividend and read yields net of it.
3. Add up your US-situs holdings; if they are approaching $60,000, read the UCITS section and talk to a cross-border professional.
4. Decide, fund by fund, whether a US-domiciled or an Irish UCITS version serves you better after withholding, fee, and estate exposure.
5. Keep every Form 1042-S — your home-country return will want it.
6. Find out how your own country taxes overseas dividends and gains; the US being zero on gains is only half the answer.

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## Check yourself

1. You bought 100 shares on 2025-03-10 and want to sell on 2026-03-10. Is the gain long-term?
2. You sold at a loss on June 3 and your broker's DRIP bought 2 shares on June 30. What happened to your loss?
3. A stock pays a qualified dividend with an ex-date of May 15. You bought on May 10 and sold on June 5. Is *your* dividend qualified?
4. A Taiwan resident receives a $100 gross dividend from a US stock. How much arrives, and why?
5. A Singapore resident holds $250,000 of US-listed ETFs at a US broker. What is the estate-tax exposure above the exemption, and what are the two standard mitigations?

<details>
<summary>Answers</summary>

1. No — you held exactly one year. The holding period must be *more than* one year; the clock starts the day after purchase, so selling on 2026-03-11 or later makes it long-term *(illustrative; confirm dates with your broker's records)*.
2. Part of the loss was **washed** — the DRIP purchase is inside the 30-days-after window. The disallowed portion is added to the basis of the 2 reinvested shares, not lost, but deferred.
3. No. You held about 26 days within the 121-day window; the test requires more than 60. The dividend is taxed at ordinary rates.
4. About **$70**. Taiwan has no US income-tax treaty, so the statutory 30% is withheld at source; Taiwan's own tax on the income is a separate question.
5. About **$190,000** above the $60,000 non-resident exemption, potentially taxed at rates up to 40% absent a treaty (Singapore has none). Mitigations: hold the exposure through **non-US-domiciled (e.g. Irish UCITS) funds**, or estate-planning structures — the latter strictly with a professional.

</details>

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## Key takeaways

- The after-tax return is the only one you can spend; timing, lot choice, and account placement put a real slice of it under your control.
- More than one year turns a gain long-term and cuts the rate sharply — "wait N days" is a strategy, and it has a break-even price you can compute.
- The wash-sale window is 61 days, applies across all accounts including IRAs, and is triggered by reinvested dividends; disallowed losses move into basis, they do not vanish.
- Dividends are qualified only if the payer qualifies *and* you pass the more-than-60-of-121-days test; REIT dividends generally do not.
- Name the lot you sell before the trade; harvest material losses into non-identical replacements and remember it defers tax, not eliminates it.
- Non-US investors face a different regime: 30% withholding unless a treaty applies (none for Taiwan, HK, Singapore), gains generally untaxed by the US under conditions, and a $60,000 estate-tax cliff on US-domiciled holdings that Irish UCITS funds sidestep.
- None of this is tax advice — rules and thresholds change; confirm your own facts with a professional.

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> **Next / Related:** Previous lesson — [ETFs & Index Investing](learning-etfs.html). Next: [**Earnings Season, Explained**](learning-earnings.html). Or head back to the [Learning hub](learning.html), then [Choose a Skill](choose-a-skill.html) to run `tax-lens` on your own holdings. See also [Concepts](concepts.html) and the [Glossary](glossary.html).

*Educational content only. Not financial advice, and not tax advice — confirm with a qualified professional.*