Real return after inflation and taxes

Compounding. Nominal returns compound annually over the holding period: endValue = principal × (1 + return)^years.

Tax model.The full nominal gain is taxed once at sale (no in-period dividend taxation modeled). Federal rate is the LTCG rate when holding ≥ 12 months, ordinary marginal otherwise. State rate is applied at the marginal income rate — most US states treat capital gains as ordinary income; the few that don’t (Massachusetts long-term schedule, etc.) can be modeled by lowering the state-rate input. Losses are not credited (gain is floored at zero).

Real value discounting. The after-tax ending value is divided by (1 + inflation)^yearsto put it in today’s purchasing power. Why discount and not just subtract: “real ≈ nominal − inflation × principal” is a common back-of-envelope shortcut, but it conflates nominal and real dollars. At 3% inflation for 1 year the two methods differ by about 3%; for longer horizons the gap compounds. The rigorous method is the discount.

What this doesn’t model. In-period dividends (assumes total return is realized at sale), wash-sale rules, tax-loss harvesting, the Net Investment Income Tax (3.8% surcharge above certain MAGI thresholds), or AMT. For a precise plan, a CPA who handles your tax situation will be worth the fee.