If shares are held in a retirement account, stock dividends and stock splits are not taxed as they are earned. Generally, in a nonretirement brokerage account, any income is taxable in the year it is received. This includes dividends, realized capital gains and interest. Qualified dividends are payments made from business profits after taxes and are taxed at 15% for most shareholders who fall within certain income thresholds. Stock splits are not a taxable event, but they do affect cost basis for a shareholder. To determine when and how much tax is owed for one of these events, look at the following criteria and review basic investing tax rules.
Dividend payments received on an account are tallied and a Form 1099-DIV is mailed by the brokerage firm to report the total for each tax year. These payments are subject to tax whether cash is received or dividends are reinvested to purchase more shares. Form 1099-DIV shows a breakdown for qualified dividends and ordinary dividends. Qualified dividends are those paid by U.S. companies or by foreign companies whose countries of domicile have special tax treaties with the United States. If the dividends are from a foreign company without such a treaty, the payments are called ordinary dividends, which are taxed as ordinary income. For example, if a shareholder of ABC, a U.S. company, receives $250 in dividends for the year, these are classified as qualified dividends, so the tax owed (for most taxpayers) is 15%, or $37.50.
Stock splits are quite different from dividends, as they are not distributions of business profits. When trying to understand stock splits or reverse splits, realize they are merely a restructuring of shares outstanding and price per share; no tax is incurred. For example, an investor owns 100 shares of ABC at $80 per share for a total cost of $8,000. If the company issues a 2-for-1 split, the investor then owns 200 shares at $40 per share but his total cost remains the same, so no gain or loss is incurred. The stock split affects only the cost basis per share. If no further investments are made into ABC, figuring the cost basis when the shares are sold is not difficult. Figuring cost basis can be tricky when additional purchases are made after a stock split.
In summary, dividends and other income to a nonretirement account are taxable, while the effects of a stock split are not calculated for tax purposes until the stock is sold. Once sold, the investor adjusts the cost basis to account for the shares that experienced the split. It is important for investors to work with their financial advisors and tax professionals to determine how dividends and stock splits affect their tax situations. For example, since 2013, qualified dividends have taxed at a rate of 20% for higher earners.
Advisor Insight
Scott Gaynor, CFP®, AIF®
KCS Wealth Advisory, LLC, Los Angeles, CA
For stock dividends, it depends on the type of account. For retirement accounts, stock dividends are not taxed. In a non-retirement account, qualified dividends are taxed at long-term capital gains rates depending on your tax bracket (federal rates are 0%, 15%, or 20%), while non-qualified dividends are taxed at ordinary income rates just like regular income. Investors must also hold shares for more than 60 days during the 120-day holding period. In general, most regular dividends from U.S. companies are considered qualified, with some exceptions.
Stock splits are generally not taxable, as the cost basis per share is updated to reflect the new stock structure and price so that the total market value is the same. Since you did not make any gains on the stock split, no taxes are owed.
FAQs
If shares are held in a retirement account, stock dividends and stock splits are not taxed as they are earned. 1 Generally, in a nonretirement brokerage account, any income is taxable in the year it is received.
Do you pay taxes on a stock split? ›
Stock splits don't create a taxable event; you merely receive more stock evidencing the same ownership interest in the corporation that issued the stock. You don't report income until you sell the stock. Your overall basis doesn't change as a result of a stock split, but your per share basis changes.
Do you get taxed on stock dividends? ›
Qualified dividends are taxed at 0%, 15% or 20% depending on taxable income and filing status. Nonqualified dividends are taxed as income at rates up to 37%. IRS form 1099-DIV helps taxpayers to accurately report dividend income.
What is the difference between a stock dividend and a stock split? ›
Stock dividend means distribution of additional shares of own stock to stockholder without any payment in return. Stock split is the distribution of additional shares more than one new share in exchange for each one existing share.
Are stock splits good or bad? ›
It's basically a draw, and the value of your investment won't change. However, investors generally react positively to stock splits, partly because these announcements signal that a company's board wants to attract investors by making the price more affordable and increasing the number of shares available.
Is a share split taxable? ›
Advisor Insight. Stock splits are generally not taxable, as the cost basis per share is updated to reflect the new stock structure and price so that the total market value is the same. Since you did not make any gains on the stock split, no taxes are owed. Financial Industry Regulatory Authority.
Do stock splits affect net income? ›
In general, dividends declared after a stock split will be reduced proportionately per share to account for the increase in shares outstanding, leaving total dividend payments unaffected. The dividend payout ratio of a company shows the percentage of net income, or earnings, paid out to shareholders in dividends.
How to avoid taxes on dividends? ›
You may be able to avoid all income taxes on dividends if your income is low enough to qualify for zero capital gains if you invest in a Roth retirement account or buy dividend stocks in a tax-advantaged education account.
Are my dividends automatically taxed? ›
Yes, the IRS taxes dividend income -- but not always; it depends on a few circ*mstances. Let's look at some exceptions. A common exception is dividends paid on stocks held in a retirement account such as a Roth IRA, traditional IRA, or 401(k).
How much tax do you pay on share dividends? ›
Outside of any tax-sheltered investments and the dividend allowance, the dividend tax rates are: 8.75% for basic rate taxpayers. 33.75% for higher rate taxpayers.
Is the split worth it? – Stock splits have no tangible impact on a company's total value—they simply create more shares at more affordable prices. Nor does a split change the total value of an investor's portfolio holding per se.
What is a 100% stock dividend? ›
Simply put, 100% stock dividend is 1:1 or 1 for 1 bonus share, as explained above, if you held 100 shares after 1:1 bonus you would have 200 shares (100 original, another 100 as bonus). The impact on the stock price is that the price becomes 1/2 the price of the stock before bonus (supply has doubled).
Should you sell or hold a stock split? ›
You would not want to base your decision to buy (or sell) a stock based solely on a stock split. A stock split does not change the value of a stock because it does not change the fundamentals or growth prospects of the underlying company.
Do investors lose money in a stock split? ›
A stock split lowers its stock price but doesn't weaken its value to current shareholders. It increases the number of shares and might entice would-be buyers to make a purchase. The total value of the stock shares remains unchanged because you still own the same value of shares, even if the number of shares increases.
What are 3 benefits to stock splits? ›
A stock split can make the shares seem more affordable, even though the underlying value of the company has not changed. It can also increase the stock's liquidity. When a stock splits, it can also result in a share price increase—even though there may be a decrease immediately after the stock split.
Do stocks usually go up after a split? ›
Although the number of shares outstanding increases by a specific multiple, the total dollar value of all shares outstanding remains the same because a split does not fundamentally change the company's value. The most common split ratios are 2-for-1 or 3-for-1 (sometimes denoted as 2:1 or 3:1).
Is a split off tax free? ›
Understanding Split-Offs
Businesses enacting a split-off must generally follow Internal Revenue practices for a Type D reorganization pursuant to Internal Revenue Code, Sections 368 and 355. Following these codes allow for a tax-free transaction primarily because shares are exchanged which is a tax-free event.
What happens to your money when a stock splits? ›
A stock split lowers its stock price but doesn't weaken its value to current shareholders. It increases the number of shares and might entice would-be buyers to make a purchase. The total value of the stock shares remains unchanged because you still own the same value of shares, even if the number of shares increases.
How do you calculate capital gains after a stock split? ›
Capital Gains and Losses - Stock Split. How can we help? A stock split will affect your number of shares and your basis in each share. To determine your new basis per share, you would divide your total adjusted basis of the old stock by the number of shares you hold after the split.
Do you pay taxes on stocks if you break even? ›
No. Even if the value of your stocks goes up, you won't pay taxes until you sell the stock. Once you sell a stock that's gone up in value and you make a profit, that's when you'll have to pay the capital gains tax. When the value of your stocks goes up, but you haven't sold them, this is known as "unrealized gains."
