Real Return After Inflation and Taxes
Example: Starting investment: 50000 $ · Nominal annual return: 8 % · Expected inflation rate: 3 % · Long-term capital gains tax rate: 20 % · Investment horizon: 25 years
| After-tax real purchasing power | $135,611 |
| Nominal final value (before tax) | $342,424 |
| Inflation-adjusted value (before tax) | $163,543 |
| Purchasing power lost to inflation + tax | $-85,611 |
Worked example
Invest $50,000 for 25 years at an 8% nominal return and you end with $342,424 on paper. Subtract 3% inflation and it is worth $163,278 in today's dollars. Then pay 20% capital gains tax on the $292,424 gain and your real after-tax purchasing power is roughly $128,763 — a fraction of that impressive headline number.
Frequently asked questions
Which tax rate applies to long-term investments?
Long-term capital gains rates (for assets held more than one year) are 0%, 15%, or 20% depending on your taxable income, per current IRS rules. High earners may also owe a 3.8% net investment income tax. Short-term gains on assets held less than a year are taxed as ordinary income, which can be 37% at the top bracket.
How should I account for inflation?
The Federal Reserve targets 2% inflation per year. Actual CPI has averaged around 3% over the past 50 years. For a conservative plan, using 3%–3.5% reflects historical experience. The Bureau of Labor Statistics publishes current CPI data monthly at bls.gov.
Does this calculator assume I sell everything at the end?
Yes — it models a lump-sum sale at the end of the horizon for simplicity, which understates the tax benefit of deferral and overstates it versus annual tax scenarios. For retirement accounts (Roth or Traditional IRA/401k), the tax treatment differs significantly — see the Roth vs. Traditional calculator for those cases.