Scrip dividends are payments made by corporations to their shareholders in the form of additional shares of stock instead of cash. In the US, scrip dividends are taxable. The shareholder’s cost basis in the newly received shares is the same as the fair market value of the shares on the date they were received. The shareholder must include the value of the stock received in their taxable income. They can also choose to sell the shares and pay taxes on the proceeds.
Scrip Dividends vs. Cash Dividends
Scrip dividends and cash dividends are both ways for companies to distribute earnings to shareholders. However, there are some key differences between the two types of dividends.
- Cash dividends: Cash dividends are paid out in cash. They are the most common type of dividend and are typically paid on a quarterly or annual basis.
- Scrip dividends: Scrip dividends are paid out in the form of additional shares of stock. They are less common than cash dividends and are typically paid when a company wants to conserve cash.
Taxation of Scrip Dividends
The taxation of scrip dividends is more complex than the taxation of cash dividends. Scrip dividends are generally not taxable until they are sold. However, there are some exceptions to this rule. For example, scrip dividends are taxable if they are received in lieu of cash dividends that would have been taxable.
The following table summarizes the taxation of scrip dividends:
| Type of scrip dividend | Taxable? |
|---|---|
| Received in lieu of cash dividends | Yes |
| Received in addition to cash dividends | No |
| Sold | Yes |
Timing of Scrip Dividend Taxability
The timing of scrip dividend taxability depends on whether the shareholder elects to receive the dividend in cash or stock.
- **Cash Dividend:** If the shareholder elects to receive the dividend in cash, the dividend is taxable in the year it is received.
- **Stock Dividend:** If the shareholder elects to receive the dividend in stock, the dividend is not taxable until the stock is sold.
In addition, the following rules apply to scrip dividends:
- The shareholder must make the election to receive the dividend in cash or stock by the record date for the dividend.
- If the shareholder does not make an election, the dividend will be paid in cash.
- Scrip dividends are not considered to be income for the purposes of the alternative minimum tax (AMT).
| Dividend Type | Taxability |
|---|---|
| Cash Dividend | Taxable in the year received |
| Stock Dividend | Not taxable until the stock is sold |
Basis and Holding Period for Scrip Dividends
When you receive a scrip dividend, you need to determine your cost basis and holding period to calculate your taxes correctly. Here’s how to do it:
- Cost Basis: Generally, the cost basis of a scrip dividend is the fair market value of the dividend on the date of distribution. If the dividend is paid in cash, the cost basis is the amount of cash received.
- Holding Period: The holding period for a scrip dividend begins on the date you receive the dividend and ends on the date you sell or dispose of it. If you hold the dividend for more than one year before selling it, any gain you make will be taxed at the long-term capital gains rate.
Here’s a table that summarizes the tax treatment of scrip dividends:
| Type of Dividend | Basis | Holding Period | Tax Rate |
|---|---|---|---|
| Scrip Dividend Paid in Stock | Fair market value of shares on distribution date | Holding period of underlying stock | Long-term capital gains if held over 1 year |
| Scrip Dividend Paid in Cash | Amount of cash received | Holding period begins on distribution date | Short-term capital gains if held less than 1 year |
Impact of Script Dividends on Retirement Accounts
When script dividends are received in a retirement account, the tax implications can differ from those in a regular brokerage account. Here’s how it works:
- Traditional IRAs: Script dividends are taxable as ordinary income upon receipt. However, if the dividends are reinvested in the same company’s stock, the basis is adjusted to reflect the dividend amount, reducing future capital gains tax liability.
- Roth IRAs: Script dividends are received tax-free since the account itself is tax-free. However, any sale of the underlying stock after the script dividend is received may trigger capital gains or losses.
| Account Type | Tax on Receipt | Basis Adjustment | Future Sale |
|---|---|---|---|
| Traditional IRA | Taxable as ordinary income | Yes | Reduced capital gains tax |
| Roth IRA | Tax-free | N/A | May trigger capital gains or losses |
Well, there you have it, folks! Now you know all about the ins and outs of scrip dividends and their tax implications in the US. If you’re still a little confused, don’t worry—you can always reach out to a tax professional for guidance. Thanks for reading! Be sure to stop by again soon for more financial wisdom and guidance.