GUIDE TO
TAX-EFFICIENT INVESTING

Considering how investments are taxed could influence your investment decisions and potentially enhance your returns. This article will explore what is meant by tax-efficient investing, outlining the ways in which tax implications can be brought into your strategy planning.

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Understanding how taxes impact your investment returns and using strategies to minimise your tax burden means that you can keep more of what you earn.

This guide will introduce you to the fundamental concepts of tax-efficient investing, including the basics of how to use tax-advantaged accounts, and other strategies to optimise your investment approach.

Tax treatments differ across jurisdictions. Not all of these products/services are offered to eToro clients. This information is strictly for informational purposes only and it is not intended as a tax declaration or a substitute for tax advice.

Understanding Capital Gains Tax

Capital Gains Tax (CGT) applies when you sell an asset for more than you paid for it. While it’s a recurring theme worldwide, each country has its own rules.

What are Capital Gains?

A capital gain occurs when the sale price of an investment exceeds its purchase price. For example, if you buy shares for $5,000 and sell them for $7,000, the $2,000 profit is your capital gain.

How is Capital Gains Tax Calculated?

CGT is only calculated when you realise a gain, for example by selling shares you previously held. If you don’t sell those shares or other assets, but instead continue to hold them, they won’t be liable for capital gains tax regardless of how much they have risen in value.

Capital gains tax is typically applied as a percentage of your gains after deducting allowable expenses and exemptions. The exact rate will depend on a number of variables, which might include:

• The country where you are domiciled for tax purposes
• Your marginal tax rate
• Any allowable expenses accrued in the process of investing
• Exemptions or allowances which might apply
• How long you have held the investment

Tax-efficient investing requires understanding the tax codes of the country where you live and how they apply to your personal circumstances. Taking the UK as an example, each individual investor benefits from an annual CGT exemption allowance. For the tax year 2025/26 you can make capital gains of £3,000 before CGT applies. In the US, investors also need to familiarise themselves with how long-term and short-term investments are taxed at different rates.

Other Taxes on Investments

Investments can also be subject to dividend tax and income tax. Dividend tax applies to income from shares, while income tax can apply to interest from bonds or rental income from property. In some jurisdictions, you may also be required to pay stamp duty when purchasing shares.

Tax-Advantaged Accounts

Tax-advantaged accounts using buy-and-hold strategies allow investments to grow free from certain taxes. That doesn’t guarantee a positive return on investments, but tax-efficiency has the potential to enhance long-term returns.

The primary benefits include tax-free growth, tax-deferred withdrawals or exemptions on certain types of income. These types of accounts are common globally, but have different structures and contribution limits which are liable to change. Here are examples from five countries in the tax year 2025/26:

• UK: Individual Savings Account (ISA) — Up to £20,000 per year.
• US: Roth IRA — $7,000 annual limit for those under 50.
• Canada: Tax-Free Savings Account (TFSA) — C$7,000 annual limit.
• Australia: Superannuation — Concessional contributions up to A$30,000.
• Germany: Riester-Rente — Contributions up to €2,100 per year (with state incentives).

Other Tax-Efficient Investment Accounts

sOther options exist besides standard tax-advantaged accounts depending on your country and circumstances.

You may be eligible to use more than one type, but selecting the best match requires understanding your full range of options.

Investing in Pension Schemes

Pension schemes, such as the UK’s workplace pension, offer tax relief on contributions and some also include potential employer matching of contributions.

Tax Loss Harvesting

Tax loss harvesting is a strategy that can help manage your tax liability by booking trades which realise gains on profitable and unprofitable trades. It involves offsetting losses from unsuccessful trades against gains from profitable ones to reduce your net capital gain.

You can open and manage these accounts in various ways, and the route you choose will likely be influenced by the types of assets you want to invest in. Some brokers, such as eToro, do not provide most tax wrapper accounts themselves (e.g. IRAs), but do offer investors access to a wide range of financial markets where investments can be held within self-managed structures.

Final thoughts

Tax-efficient investing is a key part of developing a robust long-term strategy. By understanding tax rules and using accounts that best suit your personal circumstances, you can make your money work harder.

It is important to design some flexibility into your tax strategy so that any changes to your personal situation can be accommodated. Forced withdrawals from accounts can result in additional fees impacting your returns or the forfeiting of the tax-breaks your plan was receiving. Many investors invest in a variety of different tax-advantaged accounts to enable them to adapt to any unforeseen circumstances.

Visit the eToro Academy and start exploring tax-efficient strategies.

FAQs

What are the tax implications of investing in different asset classes (e.g. stocks, bonds, property)?

Different asset classes are subject to varying tax treatments. Stocks may incur capital gains tax when sold at a profit and dividends may be subject to income tax. Bonds typically generate interest that’s taxed as income. Property investments face capital gains tax on sale and income tax on rental income, with different CGT rates applying to residential properties.

How can I track my capital gains and losses for tax purposes?

Keep detailed records of all investment transactions, including purchase dates, costs, selling prices and any fees. Many investment platforms provide annual tax statements, but the onus remains on the investor to ensure the information is correct and filed in a timely manner. Consider using portfolio tracking software or spreadsheets to monitor your gains and losses throughout the tax year. This makes completing your self-assessment much easier.

Where can I find more information about tax-advantaged accounts?

Your government’s tax authority, such as the IRS in the US or HMRC in the UK, is the most reliable starting point. You can also find consumer guides on investments and tax on investment platforms and the websites of reputable financial institutions. If you decide to crowdsource your research using social media platforms, remember to cross-reference any ideas you find with a more reliable source.

What is a “wash-sale”?

A wash sale is when you sell an investment, such as a stock, at a loss, and then buy the same or a substantially similar asset within 30 days before or after the sale. The term relates to the wash sale rule implemented by the IRS which is designed to prevent US investors from booking trades which artificially realise losses and using those losses as part of tax-harvesting plans. While the term originates from the US, wash-sale style laws exist in other tax jurisdictions and are something that all investors should research before booking short-term trades for perceived tax advantages.

Do you pay taxes on crypto investments?

This depends on where you are domiciled, but most countries apply some form of taxes on crypto investments. These taxes potentially include CGT, when you sell crypto and record a profit, but can extend to income tax on crypto mining and staking activities. The tax rules vary from country to country and are liable to change due to the fast-evolving nature of the crypto sector.