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Financial Planning / Tax Strategies


Subject:  Re: Selling stock vs. collecting dividends Date:  8/16/2020  2:52 PM
Author:  aj485 Number:  130972 of 131761

All other things being equal... Am I taxed the same if I sell $10,000 worth of stock shares once a year, or if I collect dividends of $10,000 in a given year? Thanks for your thoughts.

No, the tax liability will likely not be the same. There are differences, even within the categories of 'selling stock' vs. 'collecting dividends'. Not all stock sales and not all dividends are treated the same from a tax perspective, so you can't just compare 'selling stock' to 'collecting dividends' - you have to look at the circumstances for each.

First of all, unless your cost basis in a stock is $0, not all $10k of the stock sale will be taxed - only the gain is taxed. So selling stock to get $10k in proceeds may only result in taxes on, say, a $5k gain - or if it's a loss, the loss may actually help you save on taxes by offsetting other capital gains and possibly even up to $3k in ordinary income. Then, you need to look at how long you held the stock - if the shares you sold were held long term, then the taxes will be at the capital gains rates, which are mostly lower than ordinary income rates. If the shares you sold had been held for 1 year or less, then the gain will be taxed at ordinary income rates.

Taxation of dividends is trickier, because there are different categories of dividends:
- Ordinary dividends - taxed at ordinary income rates
- Qualified dividends - taxed at capital gains rates, if you meet holding requirements
- Non-dividend payment (formerly known as Return of Capital) - is not generally taxed, but does reduce your basis in the stock. Once you exhaust your basis in the stock, then non-dividend payments are taxed at long term capital gains rates

And of course, that doesn't account for things like 1250a dividends, if you've let your dividend paying stocks be borrowed by short sellers, or wash sales of stocks, which can all impact the taxes.

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