Stock Dividends. Everything you need to know about Income Producing Dividend Stocks
Understanding Stock Dividends
You can receive a stock dividend when you already own shares in a company's stock. This is additional shares issued to you based on the number of company's shares you already own. This is not to be confused with a regular or cash dividend that you use to reinvest in more shares. When you have a true stock dividend, you do not have an option to receive cash.
Stock dividends are not normally considered to be taxable, although there can be some exceptions which will be discussed in another article. The reason that stock dividends are usually not taxable is because your economic position as a shareholder won't change as a result. The company simply has issued additional shares to each shareholder in line with the number of shares owned. The total capitalization of the company as well as the ownership percentage of each shareholder does not change, so the value of your holding will remain unchanged.
Stock dividends are generally expressed as percentages. If a company should declare a 20% stock dividend, for example, it will issue one share for every twenty shares owned.
Once you receive a stock dividend, you next must recalculate your basis, the figure used to determine whether you have made a profit, for when you finally sell the stocks. Keep in mind that the basis is your cost per share, adjusted for such events as the stock dividend.
Your basis of the new shares comes from a partial accounting of your tax basis in your original shares.
Your holding period in the new stock will be the same as the holding period in your original shares. You want to account for your holding period because if you hold the stocks long enough, then sell for a profit, you can have those taxed as long-term capital gains, and for a lower tax rate.
You need to understand all of the figuring in order to see the new balance.
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