Capital Gains vs Dividends

Capital Gains vs Dividends Differences

Capital Gains vs Dividends are two different forms of income which an investor earns over investments made in the Real estate (Capital gains) or Stocks (Dividends). Capital gain is a rise in the value of the investment or real estate which gives it a higher worth than the purchase price. This gain is not realized until the asset is sold.

The dividend, on the other hand, is a portion of the earnings of a firm which is distributed to the shareholders as a reward. Let us analyze the various differences between capital gains vs dividends.

Capital Gains vs Dividends Infographics

Here are the top 5 differences between Capital Gains and Dividends-

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Capital Gains vs Dividends Key Differences

There are various other key differences between Capital Gains and Dividend which can be looked into:

1. Capital gain is the profit which is realized after selling off a long-term asset whereas dividend is the income received from the profits of a company for the stakeholders.
2. The occurrence of capital gain requires converting the share/asset into cash whereas dividends can provide steady periodical income.
3. The beneficiaries of capital gains are restricted to the owners and/or investors which are generally few in numbers. However, the beneficiaries of dividends are generally large in number which can run into thousands depending on the number of shares issued.
4. Capital gains are taxed differently depending on if it’s a long-term or short-term whereas dividend is normally charged at a flat rate (e.g. 10%, 15%)
5. Capital gains will occur generally once in the lifetime of the investor since the value is received upon realization whereas Dividend can be distributed on a yearly basis depending on the decision making and policies of the senior management of the company.
6. The amount of capital gain is generally on an increasing trend since it’s a long-term asset and influenced by multiple macroeconomic factors whereas the amount of dividends can be erratic and depends on the performance of the company and decisions of the management. It may be possible that they have had sufficient returns but may want to plow back an amount from the profits for investing in other activities of the firm.
7. The decision of realizing the capital gain rests in the hands of the owners/investors but shareholders cannot control the timing and the amount of dividend to be distributed.
8. In terms of emoluments, capital gains do not offer anything additional apart from the fluctuations in the gain but dividends can offer more in terms of bonus shares, stock splits etc.

The below is an example of capital gains vs dividends. Let’s say if a property is purchased for $2,00,000 and if it’s sold for $2,75,000, the amount of capital gains shall be [$2,75,000 – $2,00,000 = $75,000]. The amount of taxation on the same will vary upon the time period if it has been held. Say, the asset has been sold after 3 years at a tax rate of 20%. The amount of tax shall be [20% * 75,000 = $15,000]

The tax treatment of capital gains can help in reducing the taxable income in a given year. If one has lost money on an investment and are considering changing investment strategy, the asset can be sold at a loss and receive a tax benefit from the losses incurred on the asset. This is never the primary reason to sell.

If a firm declares dividends @ $1.50 per share then it will be multiplied by the number of shares held. Say Mr. A. is holding 12 shares of the firm then he will get dividend = 12*1.50 = $18. It is to be noted that dividends may face double taxation since it is already taxed at the corporate level and then further shareholders are charged dividend distribution tax at an individual level as well.

Capital Gains vs Dividends Head to Head Differences

Let’s look at the head to head differences between capital gains and dividend-

Basis of Comparison between Capital Gains vs Dividends	Capital Gains	Dividend
Meaning	Increase in the value of a Long-term asset	Part of the earnings distributed to shareholders
Necessity	Depends on the macroeconomic factors	Depends on the decisions of the senior management
Investment	Large investment is required for acquiring the capital asset to be eligible for capital gains	Relatively less investment for purchasing stocks
Taxation	High amount of tax	Lower amount of tax is charged
Frequency	Realised upon liquidation	On a periodical basis depending on policies.

Capital Gains vs Dividends – Final Thoughts

The objective of capital gains vs dividends is to offer income to the investors on the principal amount invested by them. Since the amount earned can be volatile, it will attract the attention of the tax authorities and thus is required to be treated cautiously and in line with the investment objectives.

Both capital gains vs dividends have a unique treatment in the U.S. tax code and knowledge of incorporating these differences within the financial plan will help to utilise the money efficiently in the long-run. Capital gains vs dividends can also help in tackling tax liabilities and reducing taxable income as well.

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This has a been a guide to the top differences between Capital Gains and Dividend. Here we also discuss the Capital Gains vs Dividends Tax key differences with infographics, Examples and comparison table. You may also have a look at the following articles –

• What is Double Taxation?
• Preferred Dividend
• Interest vs Dividend
• Dividends per Share Formula
• Dividend Payout Ratio Formula