This paper provides a critical assessment of the evolution of taxation of income from capital in Europe during the past decade.The introduction of the single currency has paved the way for important changes in European financial markets. Taxation of income from capital is one of the most important factor affecting investment decision. Proper measurement of cost of capital and return on investment cannot afford to ignore the wedges created by tax liabilities, as relative return on financial assets can be substantially altered when tax rates are brought to bear on the cost-benefit analysis of security holding and trade. To be sure, taxes are not alone in throwing sand-in-the-gears into European financial markets: trade and post-trade transaction and settlement costs as well as regulatory constraints may be hampering cross-border capital flows significantly. Substantial improvements in the efficiency of the European markets for fixed income securities, especially the degree of government and corporate bond market integration have been achieved in the nineties. Such efficiency gains can be largely attributed to the successful unification of monetary policy in Europe. As far as tax reform is concerned, the granting of tax-exempt status to foreign investment has been an important factor in fostering convergence in bond yields across Europe. Nowadays tax wedges implicit in bond yields and spreads appear to be quantitatively very small, if present at all. In contrast to the unsecured segment of the money and bond market, integration of the collateralised segment (repo market) has progressed at a slower pace. Also, the integration of European stock markets has proceeded at a relatively slow pace when compared to the rapid convergence of money and bond markets. As a result, benefits from geographical diversification of European stocks, over and above sectoral allocation, can still be gained under the single currency, despite the rising importance of industry allocation vis-a-vis country factors in driving stock returns in Europe.Our preliminary econometric evidence reported in this paper confirms that differential taxation drives a non-negligible wedge across stock market returns and valuation in Europe, as well as relative returns among large currency blocs (Europe, United States and Japan).