Capital Gains Vs Dividends Top 5 Differences Infographics

Difference Between Capital Gains and Dividends

They are two different forms of income that 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 differences between capital gains vs. dividends.

Capital Gains vs. Dividends Infographics

Let’s see the top differences between capital gains vs. dividends.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Capital Gains vs Dividends (wallstreetmojo.com)

Key Differences

Capital gain is the profit realized after selling off a long-term asset, whereas a dividend is an income received from a company’s profits for the stakeholders.The occurrence of capital gainCapital GainCapital gain refers to the profit resulting from selling a capital asset or investment at a price higher than its purchase price.read more requires converting the share/asset into cash, whereas dividends can provide steady periodical income.The beneficiaries of capital gains are restricted to the owners and investors, generally few in numbers. However, the beneficiaries of dividends are usually enormous, which can run into thousands depending on the number of shares issuedShares IssuedShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner’s equity on the Company’s balance sheet.read more.Capital gains are taxed differently depending on if it’s long-term or short-term, whereas dividend is usually charged at a flat rate (e.g., 10%, 15%).Capital gains will generally occur once in the investor’s lifetime since the value is received upon realization. In contrast, Dividends can be distributed yearly depending on the decision-making and policies of the company’s senior management.Capital gain is generally on an increasing trend since it’s a long-term asset influenced by multiple macroeconomic factors. In contrast, the number of dividends can be erratic and depends on the company’s performance and the management’s decisions. 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 firm activities.The decision to realize the capital gain rests in the hands of the owners/investors, but shareholders cannot control the timing and the number of dividends to be distributed.In terms of payments, capital gains do not offer anything additional apart from the fluctuations in the gain. Still, dividends can offer more in bonus sharesBonus SharesBonus shares refer to the stocks issued by the companies for free of cost to their existing shareholders in the proportion of their stock holdings. Companies issue such shares to compensate the shareholders with a higher dividend payout in the form of stocks.read more, stock splits, etc.

Example

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 period if it has been held. Say the asset has been sold after three 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 reduce the taxable income in a given year. If one has lost money on an investment and is considering changingInvestment strategies assist investors in determining where and how to invest based on their expected return, risk appetite, corpus amount, holding period, retirement age, industry of choice, and so on.read more investment strategyInvestment StrategyInvestment strategies assist investors in determining where and how to invest based on their expected return, risk appetite, corpus amount, holding period, retirement age, industry of choice, and so on.read more, the asset can be sold at a loss and receive a tax benefit from the losses incurred on the asset. It is never the primary reason to sell.

If a firm declares dividendsDeclares DividendsDividend declared is that portion of profits earned that the company’s board of directors decides to pay off as dividends to the shareholders of such company in return to the investment done by the shareholders through the purchase of the company’s securities.read more @ $1.50 per share, it will be multiplied by the number of shares held. Say Mr. A. is holding 12 shares of the firm, then he will get a dividend = 12*1.50 = $18. It is to be noted that dividends may face double taxationDouble TaxationDouble Taxation is a situation wherein a tax is levied twice on the same source of income. It usually occurs when the same income is taxed both at corporate as well as at the individual level.read more since it is already taxed at the corporate level. Further shareholders are also charged dividend distribution tax at an individual level.

Capital Gains vs. Dividends Comparative Table

Conclusion

The objective is to offer income to the investors on the principal amount. 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 have a unique treatment in the U.S. tax code, and knowledge of incorporating these differences within the financial plan will help to utilize the money efficiently in the long run. They can also help tackle tax liabilities and reduce taxable income.

Difference Between Capital Gains and Dividends#

Capital Gains vs. Dividends Infographics#

Key Differences#

Example#

Capital Gains vs. Dividends Comparative Table#

Conclusion#

Recommended Articles#