Quick question about dividends and capital gains

**TexasHusker** · 05-09-2021, 11:32 AM

Originally posted by disneysteve View Post

I'm sure I know this answer but wanted to be 100%.

In a taxable brokerage account, is there any difference as far as taxes are concerned between reinvesting dividends and capital gains or drawing out that income? I'd pay the same tax on that money either way, correct?

Yes. You pay the same whether you use the dividends to buy more shares through reinvestment, or use the dividends to pay for you a new boat. Capital gains are realized only when an asset is sold. Since mutual funds buy and sell all of the time, you will have capital gains (or losses) every year.

Dividends are taxed as ordinary income. Capital gains of an asset held 365 days or less are also taxed as ordinary income. At 366 days (but check with with your tax accountant to be certain), the capital gains are considered "long term" and have a lower tax rate. At least for now!

**Like2Plan** · 05-09-2021, 11:36 AM

Originally posted by disneysteve View Post

I'm sure I know this answer but wanted to be 100%.

In a taxable brokerage account, is there any difference as far as taxes are concerned between reinvesting dividends and capital gains or drawing out that income? I'd pay the same tax on that money either way, correct?

Yes...

**Like2Plan** · 05-09-2021, 11:41 AM

Originally posted by TexasHusker View Post

Yes. You pay the same whether you use the dividends to buy more shares through reinvestment, or use the dividends to pay for you a new boat. Capital gains are realized only when an asset is sold. Since mutual funds buy and sell all of the time, you will have capital gains (or losses) every year.

Dividends are taxed as ordinary income. Capital gains of an asset held 365 days or less are also taxed as ordinary income. At 366 days (but check with with your tax accountant to be certain), the capital gains are considered "long term" and have a lower tax rate. At least for now!

Actually, qualified dividends receive more favorable tax treatment. In terms of capital gains, I assume Disneysteve is referred to the involuntary capital gains you receive from your index fund as a result of buying and selling inside the fund--so, it is a done deal because you don't have any control over when they are sold.