Under the
SilGro home page for Alan Silverstein and Cathie
Grow
Email me at ajs@frii.com
Last update: April 6, 2026 (originally written in 1998! converted to
HTML and heavily edited/updated in 2026 when rediscovered)
Disclaimer: I'm not a trained or credentialed expert in this area, so this is just for fun.
Any real (as in real estate) or personal property; a tangible good, that is bought and later resold for more or less money, or which is otherwise disposed of, including in some cases expiring (such as a stock option), or destroyed, possibly with an insurance payout. Examples include stocks, bonds, houses, cars, boats, and artwork.
Not until you dispose of the asset; that is, realize the gains by selling, or by losing or throwing away the asset. You must report the gains any time you buy something and later sell it for a higher price, unless it's part of running a business, which is a whole different ball game.
Note that capital assets given away do not cost you capital gains taxes; and those passed to heirs upon death also get a "stepped up cost basis" (see below) as of the date of death, meaning the heirs could sell them soon with only small losses or gains.
If you buy something and later dispose of it for less, you can take a loss (deduct the loss against your income) if and only if the item was not held for personal benefit or use.
This is the amount you invested in a capital asset in order to own it. Your capital gain or loss is the difference between your cost basis and the sales proceeds. This can be especially messy to calculate if you buy shares in a company or mutual fund repeatedly over time (at different share prices, like with DRIP = dividend reinvestment programs) and later sell them together or in different blocks (but usually the entity tracks this for you). The cost basis in your house is how much you paid for it (principal only, not interest) plus the cost of any major improvements.
Most mutual funds are able to tell you an average cost basis for any shares you sell, and the IRS accepts this. (In fact they were required to start doing this for transactions after Jan 1, 2011.) If you trust them, you can keep your bookkeeping simpler.
Wages are "earned", that is, paid for you for work you do (including self-employment income reported on Schedule C). Interest and dividends are "unearned". Interest is what you get by loaning people your money, directly by a loan, or by investing it in various kinds of accounts or certificates of deposit. Dividends are portions of the profits you get back from businesses in which you invest your money to own a share of the company. All three types of income are taxed pretty much the same, but reported differently (W2, 1099-INT, 1099-DIV, Schedule 1/B, etc.) Also, dividends from US companies can be treated as preferential income => lower long term capital gains tax rates, not ordinary income rates.
Dividends plus any increase in the market value (capital gain) of your stock (shares), either due to speculation (people believing the company's future is brighter) or actual growth of the company (its assets and revenues divided by its number of shares of stock outstanding).
This is the risk that something you own will drop in value due to volatility. Generally the more volatile an asset, the greater the long-term average gain, but the more wildly and unpredictably the value changes day to day.
Systemic risk affects a whole industry (collection of companies), such as technology stocks if computer memory prices go up. Non-systemic risks are those that affect individual companies, such as product decisions, reputation, lawsuits, etc.
In principle, since it's possible to diversify out non-systemic risk (by not concentrating too much in just one or a few investments), the market doesn't reward you for taking it, only for taking systemic risks (that you can't avoid).
The mutual fund pools money from many investors to manage the buying and selling of other assets, usually stocks or bonds, according to a basic premise (strategy) spelled out in their bylaws and explained in their prospectus.
This is any company, usually a mutual fund, that passes through its gains and losses directly to its investors, such as a solely-owned LLC = limited liability company. Hence the company pays no taxes itself.
If a mutual fund sells an asset for a gain, it distributes this gain to all its investors in proportion to their number of shares held in the mutual fund. (Actually the net capital gain distribution is less any capital losses.) Note that you can have capital gains the same day you buy into a fund, if they sell some assets after you buy in.
At the end of each business day, for each asset held by a mutual fund, multiply the number of shares it holds times the closing price for each share, and add these to other assets like bank accounts to get the total asset value of the fund on that day. Now divide this by the number of shares held by investors in the mutual fund to get an NAV for the fund. This value is widely reported at the end of each trading day.
Mutual funds pass through the dividends and capital gains from the stocks they own on your behalf. In addition, the NAV of the fund itself can rise as it owns more assets (unrealized capital gains). You pay taxes each year on the dividends and capital gain distributions, but on the capital gain from the mutual fund shares themselves, only when you dispose of them, just like stock in a single company.
This is a fee imposed when you first buy into a mutual fund or other investment. Some investments carry no load, hence have a better overall return.
This is a fee imposed periodically, usually each year, taken from the gains posted by a mutual fund or other similar investment, before they are distributed to shareholders. They typically range 0.01%-2.0%, and lower is better.
Another form of management fee is an AUM = assets under management cost, an annual charge usually in the 1.0-2.5% range, that you pay to a financial advisor who directly manages some assets for you.
Direct sales means sending money directly to the company that issues the security (shares of a fund or stock), usually for no load or a small load. Networked sales are through brokers and agents and often carry a commission cost (through the load).
In a progressive/graduated tax model like US federal income taxes, the first dollar of your taxable income is taxed at a low rate (like zero after standard or itemized deductions); some later dollars are at a higher rate; and so on. There are income tax brackets where the percentage due on the "last dollars" rises as your total taxable income increases. The marginal rate is the percentage you pay on the next (marginal) dollar you earn or receive as income. You are considered to be in the "x% tax bracket", such as 10%, 12%, 22%, etc, according to your highest marginal rate.
If you hold the asset for more than 12 months, it's long-term. To encourage long-term investments, our government (in its infinite wisdom) has created a nightmare of calculations by taxing long term capital gains (and other "preferential income" like qualified dividends and capital gain distributions from mutual funds) in lower brackets than ordinary income. You can have QD or QCD from a mutual fund the day you buy into it, if they declare such that day.
Any tax you can avoid means more money in your pocket. But types of investments that are tax-free, such as municipal bonds, usually have proportionally lower rates of return, meaning they're only valuable to people in higher tax brackets (who have more income to start with).
Now if you can defer income taxes to later tax years, you get to keep some of your money "working for you" now (earning interest, dividends, or capital gains), especially in tax-free vehicles like Roth IRAs.
Avoiding is hard. Mainly you can invest in tax-exempt government bonds, or in bond funds that buy those kinds of bonds. Also some states don't charge income tax on gains from certain types of federal investments, like T-bills, or in many cases on some or all "retirement income" like Social Security or traditional IRA distributions or conversions.
You can defer income taxes by investing in qualified retirement vehicles (401(k), IRA, annuities, etc), and by investing in capital assets (stocks, mutual funds, real estate) and not realizing your gains until you need the money.
If you make only tax-deferred contributions to retirement funds, then your taxable cost basis in the funds is zero -- it's all taxable when you take it out -- meaning you don't have to keep detailed track of the buying/selling history in order to know your cost basis. But all distributions from such funds are treated as short-term gains (normal income), so you lose any benefit that long-term capital gains would get you (a lower tax bracket). It's a tough decision whether to put money into retirement vehicles or else non-tax-special investments that defer realizing capital gains.
In non-retirement accounts, use no-load, direct-sales funds with low management fees and minimum "turnover". That is, they minimize buying and selling of their stocks or other assets that realize capital gains. "Unmanaged" funds like index funds that blindly invest in certain mixes of stocks, bonds, etc tend to work this way. Curiously, index funds usually out-perform 80% of the active/managed funds!