Once an individual has utilized these types of accounts to the level they wish, or if they do not have these types of accounts in their jurisdiction, there are other tax reduction strategies that can be applied.  The first of which is to understand the general treatment of types of gains from owning stocks.

The most common gains are dividends payments and capital gains.  Both types of gains generally receive favorable tax treatment compared to personal income tax and are taxed at a lower rate. 

Dividends

In the case of dividends, because the tax authority has already taxed the earnings of the company before the dividends are dispersed, the personal income tax on dividends is reduced to avoid double taxation.  However, from the individual perspective this will seem like a general tax deduction compared to general income tax rates.  It should be noted that some additional taxation may creep in when international stocks are owned, as the originating local jurisdiction may tax the dividends, and the destination local jurisdiction may also tax the dividends.  Different countries have tax treaties to avoid this in many cases, however this should be fully considered in any international investing approach (even if the stock is held in a tax-free account).

Capital Gains

In the case of capital gains, these generally receive quite favorable tax treatment, often in a few different ways.  Firstly, generally you will only pay capital gains on the sale of a stock.  If you hold a stock for many years without selling, it is effectively growing tax deferred, similarly to holdings in a tax-free account.  Additionally, when you sell the stock the actual effective rate you will pay on the capital gains is typically considerably less, perhaps about half, of the rate you will pay for income as part of income taxes.  The reasons for this are varied but generally fall into three broad categories.

• The idea that governments like to provide incentives for investments, and giving capital gains preferential treatment is an incentive for individuals to make investments.  This also leads to different nations competing with each other for investment funds, with capital gains being given favorable treatment as a way to incentivize international investment into the jurisdiction.

• Capital gains represents a form of double taxation from some perspectives.  The funds invested are funds available after taxes have already been settled and therefore any capital appreciation should not be taxed, or at the very least receive significant favorable tax treatment.

• Inflation.  If a capital gain is realized after a number of years, a proportion of the gains have been inflated away and therefore the overall capital gain should be treated at least somewhat favorably.

While not all individuals are aligned with these and other reasons capital gains are treated favorably, these are the common reasons leading to favorable tax treatment of capital gains.

Beyond the preferential treatment of dividends and capital gains, some entities making the gains receive more favorable tax treatment that others.  Typically these are business entities such as an incorporated company, or non-profit or similar entities.  These types of entities are typically taxed at a lower rate than individual personal rates, and therefor generating investment returns inside an entity that is not an individual provides partial tax deferral if the funds are left inside the entity.  This can be achieved in two main different ways.  The first is making an investment into an entity which then generates investment returns within the entity and then receives this preferential tax treatment.  The second is owning a business of any kind and investing earnings of that business into investments with the corresponding gains receiving preferential tax treatment.

Whether as an individual or as part of an entity, in most jurisdictions there are rules around taking loans for investment purposes that can provide some tax advantages.  In general a loan can be taken out which can be used for investing purposes.  From a tax perspective the total return for that investment is the earnings from the investment, less the costs of making that investment.  This can be the interest rate on the loan taken out to make the investment.  Often this will require the investment to be interest or dividend paying in order to claim the loan interest as an expense, and by extension reduce the tax that is paid on the gains.  While this isn’t strictly tax reducing, because an expense is actually being incurred, it can be a related way to generate superior post tax returns, through leverage.  It should be noted that leverage is generally a dangerous investing tool as it amplifies both gains and losses, sometimes by significant multiples.  This isn’t recommended for individuals who do not already have significant time and experience in making investments and fundamentally understand what they are doing as well as their own psychology toward investing.  However, if individuals are capable and have reasonable investing experience, this can be a way to generate superior returns.

Beyond the previous ways to reduce taxes there are jurisdictional approaches.  Generally, these are only worthwhile if you have a large amount of funds that you are seeking to reduce taxes on, as they often require professionals to execute and have other associated costs.  These costs will only make sense if you can spread that over a suitably large enough gain.  Jurisdictional approaches generally involve moving or at least an entity moving to a lower tax rate jurisdiction.  Examples of this include individuals moving to a low or no tax rate area for 6 months or more (typically someplace warm) or companies moving their corporate headquarters to a tax favorable location (at present many of the world’s largest companies are headquarter in Ireland).  However, this can also include internal jurisdiction approaches such as working with tax favored internal jurisdictions to receive some or part of their preferential tax treatment (for example First Nations organizations in North America often have preferential tax treatment).  Again, these types of tax reduction strategies generally only make sense if you have sufficient large gains, and are generally best left handled by a professional.

Overall tax planning, with a view to legally reducing the taxes you owe is an important consideration in investing activities.  Ensuring that your investments are compounding at the best rate possible factoring in taxes will dramatically improve your long term gains.  Generally your investment decisions should not be heavily influenced by tax considerations, because getting the decision right is more important that managing the tax implications of right decisions.  In general, once you have used your tax free accounts to the level that you prefer, unless you enjoy figuring out tax rules and are naturally investigative, it is probably best to consult a professional which would typically be a tax accountant.  If you have very large sums you may need more than one professional to assist in managing your money and the related taxes.