Glossary · 114 terms
Taxation
All taxation terms in the EquitiesAmerica.com glossary — plain-English definitions for American investors.
1099-B(Form 1099-B)
An IRS information return that brokers and barter exchanges issue to report proceeds from securities sales, including the cost basis and holding period for covered securities, used by investors to prepare Form 8949 and Schedule D.
1099-DIV(Form 1099-DIV)
An IRS information return issued by brokers and mutual fund companies to report dividends, capital gain distributions, and other investment income paid to investors during the tax year.
60/40 Tax Rule(60/40 rule)
The 60/40 tax rule is the IRS provision under Section 1256 of the Internal Revenue Code that taxes gains and losses from qualifying contracts (such as regulated futures and broad-based index options) as 60% long-term capital gain or loss and 40% short-term capital gain or loss, regardless of the actual holding period. This blended treatment results in a lower effective tax rate on short-term gains compared to standard short-term capital gains rates.
Above-the-Line Deduction(adjustment to income)
An above-the-line deduction is a tax deduction that a taxpayer may claim to reduce gross income and arrive at adjusted gross income (AGI) regardless of whether they itemize or claim the standard deduction. These deductions appear on Schedule 1 of Form 1040 and include items such as student loan interest, educator expenses, contributions to HSAs and traditional IRAs, and self-employment tax.
Active Income(earned income)
Active income is income earned through direct participation in a trade, business, or employment, including wages, salaries, tips, commissions, and income from businesses in which the taxpayer materially participates. It is distinguished from passive income and portfolio income under the IRS passive activity rules and is subject to self-employment tax when earned through self-employment.
Adjusted Gross Income(AGI)
A taxpayer's total gross income minus specific above-the-line deductions allowed by the IRS, serving as the key income figure on Form 1040 and the basis for calculating eligibility for many credits, deductions, and tax provisions.
Alternative Minimum Tax(AMT)
A parallel federal income tax system under IRC Sections 55-59 designed to ensure that high-income taxpayers who benefit from significant deductions and exclusions still pay a minimum level of income tax.
Asset Location Optimization(asset placement)
Asset location optimization is the strategic placement of specific asset classes and investment types into account types — taxable, tax-deferred, and tax-exempt — based on the tax characteristics of each asset and account in order to maximize the household's after-tax wealth, independent of the overall asset allocation decision.
Assignment of Income Doctrine(income assignment doctrine)
The Assignment of Income Doctrine is a federal tax principle originating from Lucas v. Earl (1930) holding that income is taxed to the person who earns it or whose property generates it, regardless of whether that person directs the income to be paid to someone else — preventing taxpayers from shifting income to lower-bracket family members or other parties before it is received.
At-Risk Rules(at-risk limitation)
The at-risk rules under IRC Section 465 limit the deductibility of losses from a business or investment activity to the amount a taxpayer has economically at risk, preventing the deduction of losses funded by nonrecourse financing for which the investor bears no true economic exposure.
Average Cost Method (Mutual Funds)(average cost basis)
The average cost method is an IRS-permitted cost basis accounting approach used primarily for mutual fund shares in which all shares of a fund held in an account are assigned a uniform cost equal to the total amount invested divided by the total number of shares owned, simplifying record-keeping but sacrificing the tax optimization flexibility available through specific lot identification.
Backup Withholding(backup withholding)
Backup withholding is a flat-rate federal income tax withheld by payers from certain payments — including interest, dividends, and proceeds from broker transactions — when a payee has failed to furnish a correct Taxpayer Identification Number or has been notified by the IRS of under-reporting.
BEAT(Base Erosion and Anti-Abuse Tax)
The Base Erosion and Anti-Abuse Tax (BEAT), enacted under IRC Section 59A as part of the Tax Cuts and Jobs Act of 2017, imposes a minimum tax on large US corporations that make deductible payments to related foreign parties, targeting strategies that use cross-border deductions to erode the US tax base.
Capital Gains Tax(CGT)
A tax levied on the profit realized from the sale of a capital asset, such as stocks, bonds, or real estate, when the proceeds exceed the original purchase price.
Charitable Remainder Trust(CRT)
A Charitable Remainder Trust (CRT) is an irrevocable split-interest trust that provides an income stream to one or more non-charitable beneficiaries for a fixed term or life, with the remaining assets passing to one or more qualified charities at the end of the trust term. Donors who contribute appreciated assets to a CRT receive an immediate partial charitable deduction and can defer capital gains on the transferred assets.
Child Tax Credit(CTC)
The Child Tax Credit (CTC) is a federal tax credit that reduces the income tax liability of qualifying taxpayers with dependent children under age 17, with a maximum credit of $2,000 per qualifying child for tax year 2025. A portion of the credit — up to $1,700 — may be refundable through the Additional Child Tax Credit (ACTC) for taxpayers who owe less tax than the credit amount.
Constructive Receipt Doctrine(constructive receipt)
The Constructive Receipt Doctrine is a tax principle under Treasury Regulation 1.451-2 holding that a cash-basis taxpayer must recognize income in the year it is made available without restriction, even if the taxpayer has not physically received the funds — preventing taxpayers from deferring income recognition simply by choosing not to collect money already owed to them.
Constructive Sale(deemed sale)
A constructive sale is a transaction that the IRS treats as a taxable sale of an appreciated financial position even though the taxpayer has not literally sold the asset, typically arising when an investor enters into a short sale against the box, a futures contract, or a forward contract that eliminates substantially all risk and opportunity for gain or loss on a long position.
Cost Basis(tax basis)
The original value of an asset for tax purposes, typically the purchase price plus commissions and fees, used to calculate capital gains or losses when the asset is sold.
Cost Recovery (MACRS)(MACRS depreciation)
Cost Recovery under the Modified Accelerated Cost Recovery System (MACRS) is the IRS-prescribed framework under IRC Section 168 for depreciating business and investment property, assigning assets to recovery periods ranging from 3 to 39 years and using accelerated declining-balance methods to front-load deductions and reduce the present value of a taxpayer's tax liability.
Coverdell ESA(Coverdell ESA)
A Coverdell Education Savings Account (ESA) is a tax-advantaged account established under IRC Section 530 that allows after-tax contributions to grow federally tax-free and be distributed tax-free when used for qualified education expenses at the elementary, secondary, or post-secondary level. Unlike Section 529 plans, Coverdell ESAs have strict annual contribution limits and income-based phaseout rules for contributors.
Depreciation Recapture(Section 1250 recapture)
Depreciation recapture is the IRS mechanism that taxes the gain from the sale of depreciable property at ordinary income tax rates to the extent that depreciation deductions were previously taken, preventing taxpayers from permanently converting ordinary income deductions into lower-taxed capital gains at the time of sale. For real estate, Section 1250 recapture on accumulated straight-line depreciation is taxed at a maximum rate of 25%.
Donor-Advised Fund(DAF)
A Donor-Advised Fund (DAF) is a philanthropic account held by a public charity in which a donor makes an irrevocable contribution, receives an immediate charitable deduction for the full amount contributed, and retains advisory privileges to recommend grants to qualified charities over time. DAFs are the fastest-growing charitable giving vehicle in the United States and are sponsored by community foundations, financial institutions such as Fidelity Charitable and Schwab Charitable, and other Section 501(c)(3) organizations.
Earned Income Tax Credit(EITC)
The Earned Income Tax Credit (EITC) is a refundable federal tax credit for low-to-moderate income workers and families, designed to supplement wages and reduce tax burdens for those who meet income and family-size requirements. For tax year 2025, the maximum EITC ranges from $649 for taxpayers with no qualifying children to $7,830 for those with three or more qualifying children.
Economic Substance Doctrine(economic substance)
The Economic Substance Doctrine is a judicially created and now statutorily codified principle under IRC Section 7701(o) that disregards transactions for federal tax purposes when they lack genuine economic substance beyond the creation of tax benefits — a cornerstone of IRS anti-tax-shelter enforcement.
Effective Tax Rate
The average rate at which a taxpayer's total income is taxed, calculated by dividing total tax liability by total taxable income, reflecting the blended impact of all applicable tax brackets.
ESPP (Employee Stock Purchase Plan)(ESPP)
An Employee Stock Purchase Plan (ESPP) is a company-sponsored program under IRC Section 423 that allows eligible employees to purchase employer stock at a discount — typically up to 15% below the lower of the stock price at the beginning or end of an offering period — through after-tax payroll deductions. Qualifying ESPPs offer favorable tax treatment similar in structure to ISOs, while non-qualifying plans are taxed as ordinary income at purchase.
Estate Tax(federal estate tax)
The federal estate tax is a tax imposed on the transfer of a deceased person's taxable estate to their heirs, applied at a top marginal rate of 40% on the value of the estate exceeding the applicable exemption threshold. For 2025, the federal estate and gift tax exemption is $13.99 million per individual ($27.98 million for married couples using portability), adjusted annually for inflation.
Estimated Tax Payments(quarterly estimated taxes)
Quarterly prepayments of income tax made directly to the IRS by taxpayers whose income is not fully covered by withholding, including investors with significant capital gains, dividends, or other investment income.
FATCA(Foreign Account Tax Compliance Act)
FATCA (Foreign Account Tax Compliance Act) is a US federal law enacted in 2010 that requires foreign financial institutions to identify and report information on financial accounts held by US persons to the IRS, and requires US taxpayers to disclose specified foreign financial assets on Form 8938.
FBAR (FinCEN 114)(FinCEN 114)
The FBAR (Report of Foreign Bank and Financial Accounts), filed on FinCEN Form 114, is an annual disclosure required under the Bank Secrecy Act for US persons who have a financial interest in, or signature authority over, one or more foreign financial accounts whose aggregate value exceeded $10,000 at any point during the calendar year.
FIFO(first in first out)
An IRS-recognized cost basis accounting method that assumes the shares purchased first are sold first when only some shares of a holding are disposed of, determining which lots' basis and holding periods apply to the sale.
Foreign Earned Income Exclusion(FEIE)
The Foreign Earned Income Exclusion (FEIE) allows qualifying US citizens and resident aliens living abroad to exclude a portion of their foreign-earned wages and self-employment income from US federal income tax, reducing the double-taxation burden on Americans working outside the United States.
Foreign Tax Credit(FTC)
The Foreign Tax Credit (FTC) is a nonrefundable U.S. federal tax credit that allows taxpayers to offset income taxes paid or accrued to foreign governments against their U.S. tax liability, preventing double taxation on the same income from foreign sources. It is claimed on Form 1116 for individuals and Schedule K for pass-through entities.
Form 1040(1040)
Form 1040 is the standard IRS individual income tax return that US citizens and resident aliens use to report annual income, calculate federal tax liability, claim deductions and credits, and determine whether a refund is owed or additional tax is due.
Form 1099-INT(1099-INT)
Form 1099-INT (Interest Income) is an IRS information return issued by banks, brokerage firms, credit unions, and other payers to report interest income of $10 or more paid to a recipient during the tax year. Recipients report this income on Schedule B of Form 1040, and it is generally taxed as ordinary income at applicable marginal rates.
Form 1099-MISC(1099-MISC)
Form 1099-MISC is an IRS information return used to report miscellaneous income payments of $600 or more made to non-employee recipients during the tax year, including rents, royalties, prizes, awards, and certain other payments that do not qualify as non-employee compensation.
Form 1099-NEC(1099-NEC)
Form 1099-NEC is the IRS information return reintroduced for Tax Year 2020 to report non-employee compensation of $600 or more paid to independent contractors, freelancers, sole proprietors, and other self-employed individuals during the calendar year.
Form 1099-R(1099-R)
Form 1099-R is the IRS information return issued by payers of distributions from retirement accounts, pensions, annuities, profit-sharing plans, IRAs, insurance contracts, and survivor income benefits, reporting the gross distribution amount and any taxable portion to both the recipient and the IRS.
Form 3921 (ISO Exercise)(Form 3921)
Form 3921 is the IRS information return that corporations must file and furnish to employees whenever an Incentive Stock Option (ISO) is exercised, reporting the grant date, exercise date, exercise price, fair market value at exercise, and number of shares transferred.
Form 3922 (ESPP)(Form 3922)
Form 3922 is the IRS information return that corporations must issue to employees when stock acquired through a qualifying Employee Stock Purchase Plan (ESPP) is first transferred, providing the data employees need to determine income and basis when the shares are eventually sold.
Form 5498(Form 5498)
Form 5498 is the IRS information return filed by IRA trustees and custodians to report contributions, rollovers, conversions, recharacterizations, required minimum distribution amounts, and year-end fair market values for Individual Retirement Accounts, including traditional, Roth, SEP, and SIMPLE IRAs.
Form 8606(Form 8606)
Form 8606 is the IRS tax form used to track nondeductible (after-tax) contributions to traditional IRAs, calculate the taxable portion of IRA distributions when basis exists, report Roth IRA conversions, and record distributions from Roth IRAs to determine whether earnings are taxable.
Form 8949(8949)
An IRS tax form used to report sales and dispositions of capital assets, providing a line-by-line record of each transaction that feeds into Schedule D for the calculation of total capital gains and losses.
Form 8960 (Net Investment Income Tax)(NIIT)
Form 8960 is the IRS form used to calculate and report the 3.8 percent Net Investment Income Tax (NIIT), which applies to the lesser of a taxpayer's net investment income or the amount by which their modified adjusted gross income exceeds the applicable income threshold.
Form W-2(W-2)
Form W-2 (Wage and Tax Statement) is the IRS form that employers are required to send to each employee and to the IRS by January 31 each year, reporting the employee's annual wages and the federal, state, and other taxes withheld from their paychecks. Employees use the W-2 to complete their federal and state income tax returns.
Form W-4(Employee Withholding Certificate)
Form W-4 is the IRS Employee Withholding Certificate that employees submit to their employer to specify how much federal income tax should be withheld from each paycheck, based on filing status, dependents, additional income, and other adjustments.
Generation-Skipping Transfer Tax(GST tax)
The Generation-Skipping Transfer (GST) tax is a federal tax imposed at a flat rate of 40% on transfers of wealth to recipients who are two or more generations below the transferor — such as grandchildren or great-grandchildren — designed to prevent wealthy families from avoiding estate tax by passing wealth directly to younger generations. For 2025, the GST tax exemption matches the estate and gift tax exemption at $13.99 million per individual.
Gift Tax Basis(carryover basis)
When a capital asset is received as a gift, the recipient generally inherits the donor's original cost basis (carryover basis), meaning any pre-existing unrealized gain transfers to the recipient for future capital gains tax purposes.
GILTI(Global Intangible Low-Taxed Income)
Global Intangible Low-Taxed Income (GILTI), enacted under IRC Section 951A as part of the Tax Cuts and Jobs Act of 2017, requires US shareholders of controlled foreign corporations to include in current US taxable income a portion of the foreign corporation's earnings that exceed a routine return on tangible assets, discouraging the offshore parking of intangible profits.
Highest In, First Out (HIFO)(HIFO)
Highest In, First Out (HIFO) is a tax lot selection strategy, implemented through specific lot identification, in which the shares with the highest cost basis are sold first whenever a position is reduced, minimizing the taxable gain recognized on each sale and thereby deferring tax liability as long as possible.
Hobby Loss Rules(Section 183)
The Hobby Loss Rules under IRC Section 183 limit a taxpayer's ability to deduct expenses from an activity that the IRS determines is not engaged in for profit, capping deductions at the gross income produced by the activity and disallowing net losses that could otherwise offset other income.
In-Kind Distribution(in-kind transfer)
An in-kind distribution is a transfer of actual securities — stocks, bonds, or other assets — from an investment account to the account holder or a third party, rather than a cash distribution representing the liquidated value of those securities, which in some contexts allows the transfer to occur without triggering an immediate capital gains tax event.
Installment Sale (Tax)(installment method)
An Installment Sale under IRC Section 453 is a disposition of property in which the seller receives at least one payment after the close of the tax year of sale, allowing the seller to spread gain recognition over the years payments are received — deferring tax liability and potentially achieving lower blended tax rates on the overall transaction.
ISO (Incentive Stock Option)(ISO)
An Incentive Stock Option (ISO) is a type of employer-granted stock option that, when the applicable statutory requirements are met, allows the employee to purchase company shares at a predetermined exercise price without recognizing ordinary income at the time of exercise. ISOs are governed by IRC Section 422 and offer favorable tax treatment compared to non-qualified stock options, though they are subject to the alternative minimum tax and numerous qualifying conditions.
Itemized Deduction(itemized tax deduction)
An itemized deduction is a specific qualifying expense that a taxpayer may subtract from adjusted gross income (AGI) on Schedule A of Form 1040 instead of claiming the standard deduction, with the total reducing taxable income dollar for dollar. Common itemized deductions include mortgage interest, state and local taxes (subject to the SALT cap), charitable contributions, and unreimbursed medical expenses exceeding 7.5% of AGI.
K-1 (Schedule K-1)(Schedule K-1)
Schedule K-1 is an IRS tax form used by partnerships, S corporations, trusts, and estates to report each owner's or beneficiary's proportional share of the entity's income, deductions, credits, and other tax items for the year. Recipients use the information on their K-1 to complete their individual Form 1040, carrying each income and deduction category to the appropriate line or schedule.
Kiddie Tax(children's unearned income tax)
The kiddie tax is a provision of the U.S. Tax Code under IRC Section 1(g) that taxes the net unearned income of a dependent child — such as dividends, interest, and capital gains — at the parent's marginal tax rate rather than the child's typically lower rate. The rule was originally enacted in 1986 to prevent high-income parents from shifting investment income to their children to exploit lower tax brackets.
Like-Kind Exchange (1031)(1031 exchange)
A like-kind exchange, commonly called a 1031 exchange after Section 1031 of the Internal Revenue Code, is a transaction that allows a taxpayer to defer capital gains tax on the sale of real property held for investment or productive use in a trade or business by reinvesting the proceeds into similar qualifying real property within prescribed time limits.
Like-Kind Property (Detailed)(1031 exchange)
Like-Kind Property under IRC Section 1031 refers to real property held for productive use in a trade or business or for investment that can be exchanged for other qualifying real property in a tax-deferred exchange, allowing taxpayers to defer recognition of capital gains and depreciation recapture indefinitely by rolling proceeds into replacement property.
Long-Term Capital Gains(LTCG)
Profits from the sale of a capital asset held for more than one year, eligible for preferential federal tax rates of 0%, 15%, or 20% depending on the taxpayer's income.
Marginal Tax Rate
The rate of tax applied to the last dollar of a taxpayer's taxable income — the highest tax bracket that the taxpayer's income reaches in the current progressive tax system.
Material Participation Test(active participation)
The Material Participation Test is a set of seven IRS standards under Treasury Regulation 1.469-5T that determines whether a taxpayer actively participates in a business activity, with those who qualify treating income and losses as active (usable against other income) and those who do not treating losses as passive (deductible only against passive income).
Modified Adjusted Gross Income(MAGI)
Adjusted gross income recalculated by adding back certain deductions and excluded income items, used by the IRS to determine eligibility for specific tax benefits such as Roth IRA contributions, the Net Investment Income Tax, and ACA premium tax credits.
Municipal Bond Ladder(muni ladder)
A municipal bond ladder is a fixed income portfolio strategy in which an investor purchases individual municipal bonds with staggered maturity dates across successive years, so that a portion of the portfolio matures each year, providing regular access to principal while generating federally tax-exempt interest income throughout the holding period.
Net Investment Income Tax(NIIT)
A 3.8% surtax imposed by the Affordable Care Act on net investment income for taxpayers whose modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).
Net Operating Loss(NOL)
A net operating loss (NOL) occurs when a taxpayer's allowable tax deductions from a trade or business exceed their gross income for the tax year, resulting in negative taxable income that can be carried forward to reduce taxable income in future years. Under current law as modified by the Tax Cuts and Jobs Act of 2017, NOLs from 2018 and later may be carried forward indefinitely but can only offset up to 80% of taxable income in any single carryforward year.
Net Unrealized Appreciation (NUA)(NUA)
Net Unrealized Appreciation (NUA) is the difference between the original cost basis of employer stock held inside a qualified retirement plan and the stock's fair market value at the time of a lump-sum distribution. Under a special IRS rule, the NUA portion of that distribution is taxed as long-term capital gain rather than ordinary income, potentially producing significant tax savings for employees who have accumulated highly appreciated employer shares in a 401(k) or ESOP.
Net Unrealized Appreciation Strategy(NUA strategy)
The Net Unrealized Appreciation (NUA) strategy is a tax planning technique available to employees with employer stock inside a qualified retirement plan — such as a 401(k) — that allows the appreciation in value of that stock above its original cost basis (the NUA) to be taxed at long-term capital gains rates rather than ordinary income rates when the stock is distributed and later sold.
NSO (Non-Qualified Stock Option)(NSO)
A Non-Qualified Stock Option (NSO or NQSO) is an employer-granted stock option that does not meet the statutory requirements for ISO treatment under IRC Section 422. Upon exercise, the spread between the exercise price and the fair market value of the stock is recognized as ordinary compensation income, subjecting it to federal income tax, Social Security, and Medicare taxes, as well as applicable state taxes.
Opportunity Zone(QOZ)
An Opportunity Zone is a designated low-income census tract where investors can defer and potentially reduce federal capital gains taxes by investing realized gains into a Qualified Opportunity Fund (QOF) within 180 days of a sale, under the tax incentive program created by the Tax Cuts and Jobs Act of 2017 and codified in Sections 1400Z-1 and 1400Z-2 of the Internal Revenue Code.
Ordinary Dividend
A dividend that does not meet the IRS holding period or source requirements to be treated as a qualified dividend, and is therefore taxed at the investor's ordinary income tax rate.
Passive Activity Loss Rules(PAL rules)
The passive activity loss rules, enacted under IRC Section 469, limit the ability of taxpayers to use losses from passive activities — businesses in which they do not materially participate — to offset wages, salaries, or portfolio income.
Passive Income(passive activity income)
Passive income, as defined by the IRS, is income derived from rental activities or from trade or business activities in which the taxpayer does not materially participate. It is a distinct tax category that determines how losses from these activities can be deducted, generally limited to offsetting other passive income rather than ordinary income or portfolio income.
Phantom Income(paper income)
Phantom income is taxable income that a taxpayer must recognize and report on a tax return even though no corresponding cash has been received, creating a tax liability without an accompanying cash inflow to fund it.
Portfolio Income(investment income)
Portfolio income is income derived from investments, including dividends, interest, royalties, and capital gains from the sale of investment assets. Under the IRS passive activity rules, portfolio income is treated as a separate category distinct from both active income and passive income, meaning it generally cannot be offset by passive activity losses.
Qualified Business Income Deduction (199A)(QBI deduction)
The Qualified Business Income (QBI) deduction under IRC Section 199A, created by the Tax Cuts and Jobs Act of 2017, allows eligible self-employed individuals and pass-through business owners to deduct up to 20 percent of their qualified business income from US federal income taxes, reducing the effective tax rate on pass-through earnings.
Qualified Charitable Distribution(QCD)
A Qualified Charitable Distribution (QCD) is a direct transfer of funds from an IRA to a qualifying charity that, under IRC Section 408(d)(8), is excluded from the IRA owner's gross income. Available to IRA owners age 70-1/2 or older, the QCD can satisfy the Required Minimum Distribution (RMD) obligation without the distributed amount being included in adjusted gross income, making it especially valuable for retirees who do not need the RMD income and want to reduce AGI-dependent costs such as Medicare IRMAA surcharges.
Qualified Dividend
A dividend that meets IRS requirements to be taxed at the lower long-term capital gains rates of 0%, 15%, or 20%, rather than as ordinary income.
Qualified Opportunity Zone Fund(QOF)
A Qualified Opportunity Zone Fund (QOF) is an investment vehicle organized as a corporation or partnership that deploys at least 90% of its assets into property or businesses located in a federally designated Opportunity Zone — a low-income community designated under IRC Section 1400Z. Investors who contribute capital gains into a QOF within 180 days of the triggering sale can defer and potentially reduce their tax liability, and eliminate federal tax on appreciation inside the fund if the investment is held for at least 10 years.
Qualified Small Business Stock (QSBS)(QSBS)
Qualified Small Business Stock (QSBS) is stock in a qualifying domestic C corporation that meets the requirements of Section 1202 of the Internal Revenue Code, allowing non-corporate investors who acquire and hold the stock for more than five years to exclude up to 100% of the capital gain from federal income tax, subject to a per-issuer gain exclusion limit of the greater of $10 million or 10 times the taxpayer's adjusted basis.
Real Estate Professional Status(real estate professional)
Real Estate Professional Status is a designation under IRC Section 469(c)(7) that allows a taxpayer who spends more than 750 hours annually in real property trades or businesses in which they materially participate, and for whom such activities constitute more than half of their personal services, to treat rental real estate losses as active rather than passive — unlocking unlimited deductibility against other income.
RSU (Restricted Stock Unit)(RSU)
A Restricted Stock Unit (RSU) is an employer promise to deliver shares of company stock — or a cash equivalent — to an employee upon the satisfaction of a vesting schedule and, in some cases, additional performance conditions. Unlike stock options, RSUs have value as long as the underlying stock has any positive price, because they represent a right to receive shares outright rather than the right to purchase them at a set price.
Schedule D(Schedule D Form 1040)
An IRS tax schedule attached to Form 1040 that summarizes an investor's total capital gains and losses for the year, combining short-term and long-term results to determine the net taxable capital gain or deductible capital loss.
Section 1231 Asset(1231 property)
A Section 1231 Asset is depreciable property or real property used in a trade or business and held for more than one year, whose net gains on sale receive preferential long-term capital gains tax treatment while net losses are fully deductible as ordinary losses — creating an asymmetric, taxpayer-favorable tax outcome under IRC Section 1231.
Section 1250 Recapture(unrecaptured Section 1250 gain)
Section 1250 Recapture is a tax provision under IRC Section 1250 and the unrecaptured Section 1250 gain rules that requires taxpayers who sell depreciable real property to pay a higher rate of tax on the portion of their gain attributable to previously claimed depreciation deductions, taxed at a maximum federal rate of 25% rather than the standard long-term capital gains rates.
Section 1256 Contracts(1256 contracts)
Section 1256 contracts are regulated futures contracts, foreign currency contracts, nonequity options, and dealer equity options subject to a special IRS tax rule requiring them to be marked to market at year-end as if sold, with gains and losses taxed under a mandatory 60/40 split: 60% treated as long-term capital gain or loss and 40% as short-term, regardless of the actual holding period.
Section 529 Plan(529 plan)
A Section 529 plan is a tax-advantaged savings program authorized under IRC Section 529 and established by individual states to encourage saving for qualified education expenses. Contributions are made with after-tax dollars, grow federally tax-free, and are distributed free of federal income tax when used for qualified education expenses including tuition, room and board, books, and, since 2019, up to $10,000 per year per beneficiary for K-12 tuition.
Section 83(b) Election(83(b) election)
A Section 83(b) election is a filing made with the IRS that allows a recipient of unvested property — most commonly restricted stock or profits interests in a partnership — to recognize the fair market value of that property as ordinary income immediately at the time of grant rather than waiting until the vesting date. By accelerating income recognition, the election also starts the clock on the long-term capital gains holding period from the grant date, potentially converting future appreciation from ordinary income to preferentially taxed long-term capital gain.
Self-Employment Tax(SE tax)
Self-employment (SE) tax is the Social Security and Medicare tax owed by self-employed individuals, who must pay both the employee and employer share of these payroll taxes because they have no employer to remit the employer portion on their behalf.
Short-Term Capital Gains(STCG)
Profits from the sale of a capital asset held for one year or less, taxed at the investor's ordinary income tax rate rather than the preferential long-term capital gains rates.
Specific Identification(specific lot identification)
A cost basis accounting method that allows investors to choose exactly which tax lots are being sold when disposing of a partial position, enabling precise control over the realized gain, loss, and holding period of each transaction.
Specific Lot Identification(specific identification)
Specific lot identification is a cost basis accounting method permitted by the IRS in which an investor designates the exact purchase lot or lots being sold at the time of a transaction, enabling precise control over which embedded gains or losses are recognized and whether the holding period qualifies for long-term or short-term capital gains treatment.
Standard Deduction(standard tax deduction)
The standard deduction is a fixed dollar amount that the IRS allows taxpayers to subtract from their adjusted gross income (AGI) in lieu of itemizing individual expenses, reducing the portion of income subject to federal income tax. For tax year 2025, the standard deduction is $15,000 for single filers, $30,000 for married filing jointly, and $22,500 for heads of household.
State Income Tax Deduction (SALT)(SALT deduction)
The State and Local Tax (SALT) deduction is an itemized deduction on Schedule A of Form 1040 that allows taxpayers to deduct state and local income taxes (or sales taxes, at the taxpayer's election) and property taxes from federal taxable income, currently subject to a combined cap of $10,000 per return ($5,000 for married filing separately) under the Tax Cuts and Jobs Act of 2017.
Step Transaction Doctrine(step transaction)
The Step Transaction Doctrine is a tax principle under which the IRS and courts may collapse a series of individually structured steps into a single, integrated transaction for federal tax purposes, preventing taxpayers from achieving an indirect result that would be taxable if done directly by routing through intervening steps designed to obscure the true economic result.
Step-Up in Basis(stepped-up basis)
A tax provision under IRC Section 1014 that resets the cost basis of an inherited asset to its fair market value on the date of the decedent's death, eliminating any capital gains tax on appreciation that occurred during the deceased's lifetime.
Substantially Identical Security(wash sale rule)
A substantially identical security is an investment instrument that the IRS considers functionally the same as another security for purposes of the wash sale rule, such that selling one at a loss and purchasing the other within the 61-day wash sale window disallows the realized loss and defers it to the cost basis of the replacement security.
Tax Alpha(after-tax alpha)
Tax Alpha is the incremental after-tax return generated through systematic tax management techniques such as tax-loss harvesting, asset location optimization, and tax-efficient asset liquidation sequencing, representing the value created by proactive tax strategy rather than investment selection.
Tax Bracket
A range of taxable income to which a specific marginal tax rate applies under the U.S. federal progressive income tax system, with higher brackets applying to successively higher portions of income.
Tax Credit vs Tax Deduction(deduction vs credit)
A tax deduction reduces taxable income, which lowers tax liability by the deduction amount multiplied by the taxpayer's marginal tax rate, while a tax credit directly reduces the amount of tax owed dollar for dollar, making credits generally more valuable than deductions of equivalent amounts. Both are tools in the U.S. tax code designed to incentivize specific behaviors or provide relief to qualifying taxpayers.
Tax Drag(tax cost)
Tax drag is the reduction in an investment portfolio's compound growth rate caused by taxes paid on realized gains, dividends, and interest income during the holding period, representing the cumulative opportunity cost of capital that was remitted to the government instead of being reinvested.
Tax Efficiency(after-tax efficiency)
Tax efficiency refers to the degree to which an investment strategy, account structure, or portfolio minimizes the tax liability generated relative to the returns produced, allowing a greater share of gross returns to compound over time rather than being remitted to the Internal Revenue Service.
Tax Lot Optimization(lot selection)
Tax lot optimization is the process of systematically selecting which specific purchase lots of a security to sell — based on their cost basis, holding period, and embedded gain or loss — to minimize the current tax liability or maximize the long-term after-tax value of a portfolio when liquidating a position.
Tax Treaty(income tax treaty)
A tax treaty is a bilateral agreement between two countries that allocates taxing rights over cross-border income and capital, reduces or eliminates double taxation, and establishes rules for information exchange and dispute resolution between the two tax authorities.
Tax Withholding Calculator(IRS withholding estimator)
The IRS Tax Withholding Estimator is a free online tool at IRS.gov that helps employees, retirees, and self-employed individuals estimate their current-year federal income tax liability and determine whether their withholding or estimated payments are on track to avoid underpayment penalties.
Tax-Aware Rebalancing(tax-efficient rebalancing)
Tax-aware rebalancing is a portfolio management technique that adjusts a portfolio back toward its target asset allocation while minimizing taxable gain realizations, using strategies such as directing new contributions to underweight assets, harvesting losses to offset required gain realizations, and prioritizing rebalancing trades within tax-advantaged accounts.
Tax-Deferred(tax-deferred growth)
A classification for investment growth or income that is not subject to current-year taxation but will be taxed as ordinary income when withdrawn or realized in the future, commonly associated with traditional IRAs, 401(k) plans, and annuities.
Tax-Free Municipal Bond Interest(muni bond interest)
Tax-free municipal bond interest is income earned from bonds issued by state, county, city, or other local government entities that is generally exempt from federal income tax and, when the investor resides in the issuing state, typically also exempt from state and local income taxes. This exemption is authorized under Section 103 of the Internal Revenue Code and makes municipal bonds particularly valuable to taxpayers in higher income tax brackets.
Tax-Loss Harvesting
An investment strategy that involves deliberately selling securities at a loss to offset capital gains elsewhere in a portfolio, thereby reducing the investor's current tax liability.
Transfer Pricing(intercompany pricing)
Transfer pricing refers to the prices charged between related parties — such as a parent corporation and its subsidiaries — for the transfer of goods, services, intangible property, or financial instruments, with tax authorities scrutinizing whether those prices reflect arm's-length market terms to prevent profit-shifting to low-tax jurisdictions.
Unrelated Business Taxable Income(UBTI)
Unrelated business taxable income (UBTI) is income earned by a tax-exempt organization — such as a charity, university endowment, or IRA — from a trade or business that is regularly carried on and not substantially related to the organization's exempt purpose, subjecting that income to regular corporate or trust income tax rates.
Wash Sale Rule(wash sale)
An IRS rule under Section 1091 that disallows a claimed capital loss if the investor purchases a substantially identical security within 30 days before or after the sale that generated the loss.
Wash Sale Rule (Crypto)(crypto wash sale)
The Wash Sale Rule is an IRS provision under IRC Section 1091 that disallows a capital loss deduction when a taxpayer sells a security at a loss and repurchases a substantially identical security within 30 days before or after the sale — a rule that currently applies to stocks and bonds but, as of current law, does not apply to cryptocurrency, creating a planning opportunity unique to digital assets.