What is the Difference Between Dividend and Capital Gain?

The main difference between dividends and capital gains lies in their nature and taxation. Here are the key distinctions between the two:

1. Dividends:

• Dividends are payouts to shareholders from the profits of a company, authorized and declared by the board of directors.
• Dividends are considered income and are taxed accordingly, either as ordinary income or capital gains depending on the type of dividend.
• Qualified dividends are taxed at a lower rate than ordinary income.
• Dividends are usually paid regularly (quarterly, monthly, or annually).

1. Capital Gains:

• Capital gains are the difference between the purchase price and the value of a security when it is sold.
• Capital gains are not considered income until they are realized through the sale of an investment.
• Capital gains are taxed at different rates depending on the holding period: short-term capital gains are taxed at the ordinary income tax rate, while long-term capital gains are taxed at a lower rate.
• Capital gains are more volatile as they depend on the fluctuating prices of assets.

In summary, dividends are payments made by companies to their shareholders from their profits, while capital gains are the profits realized when an investment is sold for more than its purchase price. Dividends are generally taxed at a lower rate than ordinary income, whereas capital gains are taxed at different rates depending on the holding period.

Comparative Table: Dividend vs Capital Gain

Here is a table comparing the differences between dividends and capital gains:

Both dividends and capital gains are forms of income for investors, but they differ in their source, taxation, realization, and beneficiaries. It's essential to understand these differences when making investment decisions and considering tax implications.