Module 11 · Taxes
How savings and investments are taxed
When interest, dividends and capital gains are taxed, how foreign withholding tax and tax treaties work, and why paying tax every year slows the growth of your money.
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In this lesson
- Tell interest, dividends and capital gains apart, and say when each is usually taxed
- Calculate the tax on a foreign dividend using withholding tax and a treaty credit
- Compare the headline rates on investment income in several countries
- Show how paying tax every year reduces long-term growth compared with paying once at the end
Eva, 30, lives in Slovenia. Through an app based abroad, she received a US dividend of $200 and sold some fund units at a profit. A friend says, “The app is abroad, so nobody will tax it.” Is that right? And what does tax do to her money over many years?
Three kinds of investment income
- Interest (from deposits and bonds) is usually taxed when it is paid.
- Dividends are usually taxed when paid. A is the tax charged on that income.
- Capital gains come from selling for more than you paid. A is usually due only when you sell, which is called a realised gain. A price rise on paper is not taxed in most countries.
Many countries tax investment income separately from salary, at a flat rate. Holding-period rules reward patience in some places: in Slovenia the rate on gains falls to 0% after 15 years, and in the US gains on assets held more than a year face lower rates than gains held for a year or less.
Tax at the source and tax treaties
When a company in one country pays a dividend to an investor in another, the company’s country often takes a before the money leaves. Your home country taxes the dividend too, but a limits the foreign tax and lets you credit it against your home tax, so the same income is not taxed in full twice. The US withholds 30% by default and a lower treaty rate, often 15%, if the investor claims it on the right form.
Tax drag: paying every year slows the growth
If you pay tax on gains every year, less money stays invested to compound. If tax is paid once at the end, the whole return keeps working.
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