Final answer:
The tax treatment of dividend-paying stocks and growth stocks differs based on how dividends and capital gains are taxed. Dividends are typically taxed at a higher rate than long-term capital gains. Long-term capital gains from growth stocks are generally taxed at a lower rate.
Step-by-step explanation:
The tax treatment of dividend-paying stocks and growth stocks differs based on how dividends and capital gains are taxed.
Dividend-paying stocks provide regular income in the form of dividends, which are typically taxed at a higher rate than long-term capital gains. The tax rate for dividends depends on the investor's income bracket and the type of dividend, such as qualified or non-qualified. For example, qualified dividends are taxed at the long-term capital gains rate, while non-qualified dividends are taxed at the investor's ordinary income tax rate.
Growth stocks, on the other hand, do not pay regular dividends. Instead, investors benefit from potential capital gains when they sell the stocks at a higher price than the purchase price. Capital gains are generally taxed at a lower rate than ordinary income. The tax rate for capital gains depends on the holding period of the investment. If the stocks are held for more than one year, they are considered long-term capital gains and taxed at a lower rate. If held for one year or less, they are considered short-term capital gains and taxed at the investor's ordinary income tax rate.