How are different types of investments taxed?

Investments can help you grow money for the future.
Investments can help you grow money for the future.

From the Roman tax on urine to the Boston Tea Party to the latest kerfuffle over corporate tax inversions, organized society has been performing a complex and sometimes bizarre dance around the matter of taxation.

Let's back up to that first example. For starters, why tax urine? According to the Roman historian Suetonius, it was common practice in first-century Rome to sell the contents of public urinals for use in applications from leather tanning to laundering. Suetonius reports that the Emperor Vespasian saw an opportunity to raise some much-needed revenue and imposed a tax on pee.

The policy was such a success that when Vespasian's son, Titus, complained it was a smelly way to fund the government, his father pointed out that while urine might reek, the gold they made from it most certainly did not.

The urine tax gave rise to the Latin saying, "pecunia non olet," meaning, "money doesn't stink." The whole thing might sound peculiar to modern ears, but consider this: Bill Gates recently invested in urine-powered mobile phones. To be precise, the Bill & Melinda Gates Foundation invested in a project to create a phone that runs on batteries powered by urine. That's fascinating on its own, but it also brings us to the burning question — what would Vespasian think? Or, in other words, how should such an investment be taxed?

To answer that question, we need to start by defining our terms. What exactly is an investment, after all? It's a popular term these days — so popular that its meaning has become a bit cloudy. Consumers no longer simply buy coffee machines; they "invest" in them. A trip to the Bahamas isn't a luxury; it's an "investment" in your mental health. More justifiably perhaps, people often speak of investing in their education. But does the IRS have similarly broad views? Let's find out.