Why are stock dividends and realized asset capital gains (longer than 1yr) considered Tax Preferenced?

Why are stock dividends and realized asset capital gains (longer than 1yr) considered Tax Preferenced?

Expert Solution

Stock Dividends are paid to investors from the profits remaining to a Company after paying all operating expenses, fixed expenses like interest on debt and dividend to preference shareholders. Dividends are usually paid in cash and are of two types: ordinary and qualified. Ordinary dividends are taxable as usual income (@10 to 37% tax rate), whereas qualified dividend is subject to the lower capital gains rate (20%, 15%, or 0%) . Hence, qualified dividends attract the rates applicable to long term capital gains and thus are more preferred. Certain conditions need to be fulfilled to be classified as qualified dividend as mentioned in tax laws.

Capital gains on assets held by investors (share sale) attracts lower tax rates if the said capital gains are long term , i.e, if the asset was held for more than 1 year before sale. Short-term capital gains are taxed as ordinary income for the year. Hence, qualifiying as a long term asset is highly preferred among investors.

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