Non-Taxable Distribution
Candlefocus EditorIn the case of a stock dividend, the distribution is reported to the IRS as a receipt of additional stock. The number of new shares issued to the investor is proportional to the number of shares owned. The distribution is usually taxable when stock is sold, but not until then. Additionally, the new shares purchased will reduce the cost basis in the pre-distribution stock. On the other hand, stock splits involve dividing the current stock on the market into a larger number of shares. Similar to a dividend, the investor’s current stock is divided in the form of additional shares with no taxable gain at the time of the transaction. However, when the shareholders do sell their stocks, their cost basis will be reduced.
A corporate liquidation, on the other hand, is the process of a company selling off its assets in order to cease operations. The distributed income as a result of liquidation is also non-taxable. The IRS considers a non-liquidating distribution to be a non-taxable exchange between shareholders and the company. This allows investors of the company to receive a return of capital on the investment and any appreciation in the business’ value, tax free.
In summary, non-taxable distributions are an important aspect to consider when investing in stocks and understanding the effects of corporate action. Non-taxable distributions generated through stock dividends, stock splits, or corporate liquidations are an attractive form of return on an investment. For investors, it means that any gain from this form of distribution is not taxed until the shareholders decide to sell their stocks. Understanding the tax implications of non-taxable distributions can help investors make informed decisions about their investments and take advantage of tax saving opportunities.