Taxable Income, Book Value, Market Value and Investment Returns: What Does It All Mean?
As investors gather their tax information for the 2019 tax season, we thought it would be helpful to address two recurring questions that come up this time of year.
“My investment returns were strong last year, but my accountant doesn’t seem so sure as I don’t have a lot of taxable investment income to report. How did I really do overall?”
This common comment shines a light on the relationship between a portfolio’s investment return and what qualifies as taxable income. It is helpful to approach each concept separately to understand their connection.
Your portfolio’s investment return represents the amount of money your portfolio made over a given period, expressed in percentage terms. There are four possible contributors to investment return: dividends, interest, net realized appreciation and net unrealized appreciation.
Dividends are paid to shareholders (i.e. owners of stock) out of the profit earned by a corporation. Interest is paid to owners of fixed income investments such as Guaranteed Investment Certificates (GICs), corporate bonds and government bonds. As a lender to a corporation, financial institution or government, you receive periodic interest from the borrower. Interest and dividends are generally received as a cash deposit directly to your investment account, thereby contributing to your portfolio’s overall g