Difference Between Dividend and Capital Gain

Dividend vs Capital Gain
 

The purpose of making an investment is to gain some sort of financial benefit at the time of maturity. When an investment in made in stocks, there are two types of financial returns that can be enjoyed by the investor; those are dividends and capital gains. However, capital gains can also be obtained through other forms of investment. Dividends and capital gains are very different to each other in terms of the types of assets from which each arises from and tax treatment. The following article provides a comprehensive overview of each and explains the differences and similarities between them.

Capital Gain

Capital gains are defined as the gains that arise from the sale of a capital asset that is used for business purposes, or is held for a period of more than one year. In simpler terms, capital gains arise when an investor/individual makes a profit from the appreciation in the value of an asset. Capital gains are profits associated to assets such as stocks, land, building, investment securities, etc. Capital gains are obtained by individuals when they are able to sell their assets at a price higher than the price at which they purchased the asset. The difference between the purchase price and higher sale price is called a capital gain.

Capital gains are taxable, and the rate of taxation applied for capital gains are usually higher. However, paying capital gains tax can be avoided by investing the proceeds from the sale of the asset in a similar asset within 180 days of the sale.

Dividend

Dividends are not considered to be a capital gain as they are a form of income received by the shareholder. Dividends will be paid at varying periods depending on the revenue generated by the firm. A dividend will be paid to a shareholder as a form of compensation for holding shares in the firm. Since dividends are treated as income, the tax rate applied for dividends is lower to encourage further investment.

Dividend vs Capital Gain

Capital gains and dividends are both financial gains available to investors of stock. Capital gains can be obtained, not just by selling shares, but also through the sale of other capital assets such as property, plant, equipment, machinery that is held for a longer period of time. Dividends, however, are only obtained by investing in stock and are paid to shareholders at different intervals depending on the amount of revenue generated and the types of shares held by shareholders. The tax rate for capital gains will be higher than tax applied for dividends.

Summary:

• When an investment in made in stocks, there are two types of financial returns that can be enjoyed by the investor; those are dividends and capital gains.

• Capital gains are defined as the gains that arise from the sale of a capital asset that is used for business purposes, or is held for a period of more than one year.

• Dividends are not considered to be a capital gain as they are a form of income received by the shareholder.

• The tax rate for capital gains will be higher than tax applied for dividends.