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[Source:] As you can see in the table, the $105,000 government bond matures at $100,000, for a capital loss of $5,000. The investor would also collect interest totalling $9,660 over the three years ($100,000 x 0.0322 x 3). But here’s the thing: Even though the capital loss takes a big bite out of the investor’s return, the entire $9,660 in interest payments is taxable at the investor’s marginal rate (which is assumed here to be 46.41%).

The tax hit works out to $4,483. If you subtract that amount, and the $5,000 capital loss, from the $9,660, in interest the investor is left with an after-tax return of just $177. True, he could theoretically use the capital loss to offset other capital gains – assuming he has them – but that would only boost the net return to $1,337, which is still pretty lousy. True, he could theoretically use the capital loss to offset other capital gains – assuming he has them – but that would only boost the net return to $1,337, which is still pretty lousy.

[Source:]](http://www.theglobeandmail.com/globe-investor/investor-education/bonds-or-gics-for-taxable-investors-the-choice-is-clear/article5356721/)

To calculate the after-tax return with the use of $5,000 capital loss, why perform the arithmetic coloured in orange above? To wit, why multiply $5000 x 50% x 46.41%?
I know that the article assumes 46.41% as the investor's marginal tax rate.

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Capital gains have what's called a 50% inclusion rate. IOW only 50% of the gain is taxable.

It's this rate that makes premium bonds a bad investment. If interest and capital gains were taxed at the same rate, it wouldn't matter. OTOH it's a great time to buy discount bonds if you can find them.

The inclusion rate can change. In 1990 it was 75%, before that it was ~67% for a time. We have this rate because it's somewhat unfair (if this word can ever apply to taxes) to tax long term capital gains at 100% since much of the gain can be due to inflation. As such, it's not a real gain.

  • +1. Thanks, but because the orange calculates the AFTER-tax return, why is the taxable gain (50% x 2500) multiplied by 46.41% Should it NOT be multiplied by (100 ― 46.41)%? – Greek - Area 51 Proposal Aug 11 '15 at 20:45
  • It's actually a capital loss. If it goes unused forever the after tax return is the $177. They are saying if you can use the loss, it will net you $5000*50%*46%. I'm guessing the (100-46%) you wrote is implying you get to keep ~54% of the taxable amount of a capital GAIN, which is true. You may be confusing "what you owe" with "what you keep". – brian Aug 11 '15 at 20:56

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