Returns of capital that exceed the stockholder’s basis in stock are typically
treated as capital gains.
Stock dividends are additional distributions of corporate stock to
Whether a stock dividend is taxable or not depends upon
whether or not it is proportional
Most stock dividends are proportional stock dividends in that the shareholder has
the same proportional interest in the corporation after the dividend as before the
The shareholder simply receives more shares and no additional assets
For example, if a corporation pays a 10% stock dividend, the
corporation has 10% more outstanding shares after the dividend.
owning 1,000 shares now has 1,100 shares.
If he had paid $10,000 for the
original shares, he simply divides that amount by the new number of shares and
now has a cost basis of $9.09 per share.
The proportional style of stock dividend
is not taxable.
The taxpayer’s total cost basis in the stock is the same but the cost
basis per share is lower after the stock dividend.