After-Tax Basis (Bonds) - Explained
What is After-Tax Basis for Bond?
Written by Jason Gordon
Updated at April 8th, 2022
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What is the after-tax basis of bonds?
The basis (cost basis) of an investment is the principal amount paid on the investment. The after-tax basis is used for taxable bonds to calculate the return on the investment by deducting the taxes paid on the bond from the yield of the bond. The after-tax basis also refers to how a comparison is made between the net yields of taxable bonds and tax-exempt bonds.
How is the After-Tax Basis of Bonds Used?
Usually, investors are interested in comparing the return on investment otherwise called yields of two different investment instruments. Taxable bonds, for instance, may offer higher returns than tax-exempt bonds, through the after-tax basis, investors can accurately compare the yields of these two products. This comparison is done by subtracting the taxes paid on bonds from the yield. Finding out the after-tax basis of a bond might be a little technical, this is why many investors seek the help of a tax expert in order to know the exact amount to be paid as tax on a particular investment. Different investment instruments also attract different taxes which is based on their earnings.
Considerations Besides After-Tax Costs
A corporate bond is a taxable bond when the after-tax basis of this bond is calculated, it helps to determine how profitable the bond is as compared to other tax-exempt bonds. When measuring the profitability of a bond, it is not sufficient to use just the after-tax basis, there are other factors that must be put into consideration such as the risks of the investment. Tax experts and financial professionals provide the needed assistance to investors when measuring the profitability of investments to know which is better.
