Contrast how bond portfolios are run for investors who pay tax and for those who do not

A fully tax-exempt investor, such as a pension fund or endowment in most jurisdictions, can compare returns before tax and largely ignore the form in which they arrive, though some streams, such as foreign dividends with tax withheld, may still be taxed. A taxable investor must maximise after-tax return, which changes many decisions: the mix of coupon income versus capital gains; the timing of sales, because deferring gains defers tax and holding periods may qualify gains for lower rates; realising losses to offset gains; and the use of tax-exempt bonds where available. Turnover becomes more costly because each sale can trigger tax. When comparing a taxable and a tax-exempt bond, set yield × (1 − t) against the exempt yield. The trap is recommending a high-turnover active strategy to a taxable client without counting the tax drag.