Question

A corporation may choose to pay its shareholders with cash dividends or stock dividends. Which of the following statements concerning the tax status of these events is the most accurate?

A. Both forms of dividends are taxable.
B. While only the cash dividend is taxable when received, the receipt of stock dividends will require the investor to adjust her cost basis per share.
C. Neither form of dividend is taxable.
D. While only the stock dividend is taxable when received, the receipt of cash dividends will require the investor to adjust in her cost basis per share.

Answer 1

The accurate statement about tax status of dividends is that cash dividends are taxable upon receipt, while stock dividends adjust the cost basis of the shares and are not immediately taxable.A

Step-by-step explanation:

The most accurate statement concerning the tax status of cash dividends and stock dividends is: B. While only the cash dividend is taxable when received, the receipt of stock dividends will require the investor to adjust her cost basis per share.

This means that cash dividends are taxed as income when they are distributed to shareholders. On the other hand, stock dividends are generally not immediately taxable; instead, they adjust an investor's cost basis in the stock.

A capital gain is realized when the stock is sold for more than the adjusted basis.