Definition:
Capital gain dividends are dividends paid to shareholders from a corporation’s capital gains, rather than from its current earnings. They typically occur when a company sells a capital asset, such as a building or investment, at a profit.
Key points about capital gain dividends:
- Capital gains: Capital gain dividends are derived from the sale of capital assets.
- Tax treatment: Capital gain dividends are taxed at the same rate as long-term capital gains, which is generally lower than the ordinary income tax rate.
- Dividend income: Capital gain dividends are still considered dividend income for tax purposes, even though they are derived from capital gains.
- Reporting: Capital gain dividends are reported on the shareholder’s tax return as dividend income.
Why are capital gain dividends important?
- Tax benefits: Capital gain dividends offer tax benefits compared to ordinary dividends, as they are taxed at a lower rate.
- Income generation: They can be a source of income for investors.
- Company strategy: Companies may choose to distribute capital gains as dividends to avoid double taxation.
In essence, capital gain dividends are dividends paid to shareholders from a corporation’s capital gains, and they offer tax benefits compared to ordinary dividends.
