How to measure capital gain after a dividend?

Question

If I bought 10 shares of a stock at $10 each, I pay $100 + commissions. If the next day the company pays a dividend of $1, the stock price goes to $9 doesn't it?

When measuring capital gain in selling the stock the next day, do I measure gain from the $10+commissions level or the $9+commissions level?

In otherwords do I have to adjust my base cost for a stock after every dividend distribution so that the capital gains calculation makes sense?

Thanks.

I want to know because as far as I know the dividends and capital gains are taxed at different rates. Basically, I want to know that if I sell the day after ex-date (after the dividend) at $9 each, do I get to claim a capital loss from the $10 level, or is my capital gain $0.

Answer 1

The capital gain/loss is the difference between the selling price and your basis. Your basis is what you have invested in the stock in post-tax dollars. Basically, if you get a dividend (and pay tax on that dividend), you can ignore it when considering your capital gains.

Example, buy stock for $10, and it pays a dividend of $1, and you sell the stock for $9 (all in the same year), you have:

Dividend = $1

Capital Gain/Loss = $9 (selling price) - $10 (purchase price) = $1 loss

The gain and loss offset each other which makes sense. If you didn't make any money, you shouldn't pay tax or get a tax break.

There may be some marginal differences in tax rates in Canada between dividend gains and capital losses, but in the U.S., they are fairly close.

One thing to consider (in the U.S. anyway), if have a net capital loss of more than $3,000 in a year, you can only claim the first $3,000 in that year and the rest carry over to the next year. So, if you had $10,000 of dividend gain and $10,000 of capital loss, you would have a net taxable income of $7,000. $10,000 of dividend gains minus $3,000 of capital losses. The remaining unallowed capital losses ($7,000) are carried over to the next year and continue to carry over until used up or until the death of the taxpayer.

Hope this helps!

Answer 2

I don't know about Canada but in the US, capital gain and stock dividend are two separate things. They are treated differently and taxed differently by the IRS. A stock offering large dividend payments (an indication the company is doing well) will influence its stock price to increase. The opposite is true. There are situations however where stock price will go up or down regardless of dividend payments because of other speculative issues. For example, the high tech Internet stocks went through the roof even if the company was actually losing money but the investors were betting on the future position of the industry.

Answer 3

Wait until the end of the year you will get a 1099 from the stock company. It will tell you what is ordinary gain and what amount is capital gain. It is very unlikely that you or any one else can make that determination with the information available nor can I determine why you would care until tax time when you will have it on the 1099. If you have some specific reason to know beforehand post it in additional info and we may be able to help.