After tax return calculator

The drag here is 1.76, and the unit matters. It is 1.76 percentage points off an 8 percent return, which is 22 percent of the return: the tax rate, exactly as the formula says. Calling it a 1.76 percent drag invites someone to subtract it twice.

The same shape at 10 percent taxed at 24 percent leaves 7.6 percent and a 2.4 point drag. Higher return and higher rate both widen the gap, which is why the loss to tax compounds fastest in exactly the places returns are highest.

The rate is not the tax bracket by default. Interest is usually taxed as ordinary income, so the bracket rate applies. Long term gains and qualified dividends are usually taxed lower. A holding sold within a year is usually taxed at the ordinary rate rather than the lower one.

That means one portfolio can carry several values of $t$ at once, and the honest way to use this identity is one asset at a time. Effective tax rate measures the blended figure across a whole return instead.

In a tax deferred account nothing is taxed until withdrawal, so $t$ during the holding period is zero and the drag disappears from the compounding years. In a taxable account the drag applies every year the income is realised, which is why turnover matters as much as the rate.

That is the practical use of this number: it prices the difference between the same investment in two different wrappers. See tax deferred and taxable account for the two containers.

After tax return still counts in nominal money. Taking inflation off it as well gives the real after tax return, which is what actually decides purchasing power, and the real return calculator does that half. The two adjustments are separate and both apply. This is educational material, not financial advice.