Question

How is the tax treatment of a dividend distribution different from stock redemption?

Answer 1

Stock redemption is when a company buy backs shares from the share holders at higher than the market price generally. As for tax treatment, dividend is taxed at the time of its payment by the company at the rate of 15% up to $425,800 if filing singly, $479,000 if married and filing jointly and at rates 20% above that in hands of share holder.

Where as stock redemption can either be treated as dividend or capital gain depending upon the status with corporation after redemption. If a stockholder's equity interest relative to other stockholders in the corporation remains the same, then the stock redemption is treated as a dividend payment (deemed dividend redemption) in so far as it can be paid out of earnings and profit (E&P). However if stock redemption decreases the shareholders equity it will be treated as capital gain or loss.

Another difference lies in the timing, while dividend is taxed at the time of payment, stock redemption can be timed by the shareholders as per their investment and taxation strategy.

Hope this helps, let know for any clarification.