Why income strategies lose to the index after tax
An income portfolio and an accumulating index fund can earn the same return and hand you very different amounts. The gap is not a detail at the margin: on our strategies it runs between two and fifteen points a year. Here is where it goes, and how much of it comes back.
The asymmetry, in one paragraph
A distribution is taxed on the whole amount, the day it arrives. A sale is taxed on the gain only — and after some years of growth the gain is roughly half the value, so the effective rate is about half the headline one. Two portfolios earning 15% a year therefore pay very different amounts of tax, and the difference compounds for as long as you hold them.
An accumulating index fund pays almost nothing until you sell. An income portfolio pays every single month, on every euro it distributes, whether or not you needed that euro.
What it costs, strategy by strategy
The same twelve strategies, gross and after the Italian regime: 26% on distributions and gains, 0.2% a year on the portfolio value, 12.5% on the government-bond share, €1.65 per trade.
| Strategy | Gross | Net | Cost | Income a month per €10k |
|---|---|---|---|---|
| All IncomeShares | +25.5% | +9.9% | −15.6 pts | €443 |
| Income Target 5 | +11.8% | +4.2% | −7.6 pts | €330 |
| Income Target Growth | +13.6% | +6.8% | −6.8 pts | €238 |
| Income Balanced | +13.4% | +8.6% | −4.8 pts | €189 |
| All Weather Income | +11.5% | +6.9% | −4.6 pts | €119 |
| Sustainable Income | +14.1% | +10.4% | −3.7 pts | €99 |
| Income Conservative | +14.7% | +11.2% | −3.5 pts | €113 |
| Euro Income | +16.7% | +13.2% | −3.5 pts | €41 |
| Core Seven | +15.9% | +13.0% | −2.9 pts | €24 |
| Core Plus | +19.8% | +18.8% | −1.0 pts | €20 |
| Tech Income | +19.7% | +18.5% | −1.2 pts | €19 |
| Growth Income | +19.7% | +18.3% | −1.4 pts | €26 |
| S&P 500, distributing | +19.1% | +18.5% | −0.6 pts | €6 |
The pattern is exact and it has no exceptions: the more a strategy pays, the more it loses to tax. The three that survive the tax almost intact are the three that distribute least. The one that pays €443 a month loses fifteen and a half points a year.
The part that comes back: offsetting realised losses
In Italy the income and gains of certificates and ETNs — which is what the IncomeShares products and some YieldMax ones are — count as "redditi diversi". A realised loss can be set against them for the current year and the four that follow. Harmonised ETFs cannot do it: their income is "redditi di capitale", taxed in full whatever losses you are carrying.
Selling a falling position and buying it straight back realises the loss without changing what you hold. It costs two commissions and the risk of the price moving in between; our simulations charge both commissions.
| Strategy | Net, no offset | Net, with offset | Recovered |
|---|---|---|---|
| All IncomeShares | +9.9% | +18.3% | +8.4 pts |
| Income Target 5 | +4.2% | +8.0% | +3.8 pts |
| Income Target Growth | +6.8% | +9.8% | +3.0 pts |
| Income Balanced | +8.6% | +10.7% | +2.1 pts |
| All Weather Income | +6.9% | +8.0% | +1.1 pts |
| Income Conservative | +11.2% | +12.4% | +1.2 pts |
| Euro Income | +13.2% | +13.2% | none |
| Core Plus, Tech Income, Growth Income | +18.8 / 18.5 / 18.3% | unchanged | none |
The recovery is largest exactly where the damage was largest. All IncomeShares goes from +9.9% to +18.3%: the eroding products generate realised losses continuously, and those losses shelter the distributions of the others. On strategies built from harmonised ETFs the offsetting is worth nothing, because the instruments do not allow it.
What this means in practice
The instrument matters as much as the fund. Two products with the same underlying and the same yield are worth different amounts after tax if one is an ETP and the other a harmonised ETF. Our fund pages show which is which, because in Italy it changes the outcome by several points a year.
High yield is expensive to hold. Not because the funds are bad, but because tax is charged on the gross distribution monthly. If you do not need the cash, an accumulating instrument keeps more of it — and that is a boring conclusion that an income website has little interest in reaching, which is precisely why we publish it.
The construction can halve the damage. Keeping the option-income sleeve to a fifth of the capital costs about half a point of gross return and cuts the tax bill dramatically, while still paying three times what the index pays. That is the trade-off our strategies page is built to show.
Method and limits
- One country, one regimeFigures use the Italian rates in an administered account. Your own tax profile recalculates every number on the site; other countries have different rules on offsetting, and some do not tax private capital gains at all.
- Not a tax calculationWe apply the rates you enter to simulated flows. Your actual position depends on your broker, your residence and your whole portfolio.
- Short periodsMost strategies start in 2023 and All IncomeShares in August 2024. The tax arithmetic does not depend on the period; the returns very much do.
- Two commissions per harvestEach sell-and-rebuy is charged twice, at the fee in your profile. The price risk between the two orders is not modelled.