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I'm all for this, far too much wealth transfer from companies to investors, the worst use debt for buybacks, but tax newbie here, how are shareholders impacted

I'm all for this, far too much wealth transfer from companies to investors, the worst use debt for buybacks, but tax newbie here, how are shareholders impacted taxwise when share buybacks happen? I'm guessing it's an unrealised capital gain, so no tax impact until you sell?

klyrs 4y ago
It sounds like the companies doing the buyback pay 2% on the amount they spend on the buyback. It doesn't look like shareholders would be directly impacted, except for the sellers realizing gains in the transaction. That said, I'm not quite certain of who sells in a stock buyback.
- Infinity315 4y ago
  During a stock buy back they just buy stocks on the open market. They reduce the number of outstanding shares, i.e. number of shares that can be purchased. The value of a single stock is determined by (company value / number of outstanding shares). By reducing the number of outstanding shares, each individual share goes up in value.
  - seanmcdirmid 4y ago
    Often doesn’t the stock go back out as grants to employees? So rather than create new shares, diluting share value, they buy stock to then grant to employees, so the stock buyback is essentially taxed as personal income.
    - erichocean 4y ago
      Yes, it's a way for companies with massive profits to route them to their employees (read: executives), not their shareholders.
      - Ekaros 4y ago
        And manipulate the stock prices to look to perform better than it should. They could just pay dividends, but then some argue those would be taxed at time where as buybacks are only if sold later at profit.
        seanmcdirmid 4y ago
        Dividends are taxed twice, as corporate income then as personal income to whoever they are granted to (at least to Americans, other countries have different tax rules). A buy back is only taxed as personal income when granted to the employee.
        lotsofpulp 4y ago
        What about the capital gains tax for the entity the company is buying the share from?
        seanmcdirmid 4y ago
        If it is like a 401K fund, the tax is deferred (it will be treated income rather than capital gains later). But they also wouldn't have had to charge tax right away for dividends (dividends are re-invested into the fund, and taxed as income later).
        JumpCrisscross 4y ago
        > manipulate the stock prices to look to perform better than it should They're taking actions that raise the stock price. That hardly counts as manipulation. (It would count as manipulation if the buyback were conveniently timed to coincide with share-price incentives.)
        seanmcdirmid 4y ago
        The money used for the buyback makes the company worth less, so it should be neutral if the share price was accurate. It never is of course.
    - JumpCrisscross 4y ago
      > doesn’t the stock go back out as grants to employees? I'd be curious to see a study supporting this claim.
      - seanmcdirmid 4y ago
        It’s definitely a common thing in publicly traded tech. Those stock grants have to come from somewhere, and simply creating new stock dilutes everyone shares. Though I’m not sure how often it happens.
        JumpCrisscross 4y ago
        > stock grants have to come from somewhere, and simply creating new stock dilutes everyone shares This is how it works. It's why companies report an earnings per share on a fully-diluted basis.
        seanmcdirmid 4y ago
        It’s how it often works, but buybacks are an option to avoid diluting share price (issuing stock diluted share price, buying it back does the opposite, though should be neutral).
        MrMan 4y ago
        but debt taken out to fund buybacks is also a form of dilution
- sanjayio 4y ago
  It sounds like shareholders won’t be directly impacted but companies deciding to do buybacks might decide otherwise with a tax. It’s marginal at 2% but imagine this hits 5-10%. Then buybacks might make less sense for a company. That will impact shareholders who are usually employees who have been working their asses off for years and have lucked out with a company that actually offers buybacks.
- jasmer 4y ago
  Shareholders are 100% paying this tax. Shareholders own the company; If the company pays X% tax, it really means the 'shareholders' are paying it. (Edit: For example the company has $200 in assets. They pay out $100 in a buyback, the remaining shareholders would have to pay the $2 out of their assets. This would technically play out in the valuation of the shares at the time of buyback.) Moreover, it will affect companies decision making for no obvious benefit to anyone. This is a total curve ball, I can't even fathom why the government is doing this, there is no obvious upside. It's a really odd things that 'share buybacks' are considered some kind of negative thing. They are a re-balancing financial activity for the most part. Money goes in, money comes out and goes elsewhere etc. - this is good. Edit: it's a bit like having a tax for taking cash out of a bank account. If the company needs the money for productive things, they probably would not be doing a buyback. The notion the gov. would want to inhibit money from moving from one spot where it's probably not being used efficiently, makes no sense. If the government needs to raise revenues, it would be far more rational to simply hike corporate taxes by some amount.
- refurb 4y ago
  It’s a silly law. They won’t do share buybacks and then distribute earnings via distributions or some other mechanism. It’s really odd law I’m guessing is just a populist move to get votes. There is nothing that makes stock buy backs any worse than other methods of distributing earnings. They could just pay out dividends directly instead. I have no idea what the intent of the law is other than “someone doesn’t like stock buy backs”.
jasmer 4y ago
So this is probably a bad policy almost irrespective where you are on the socialist/capitalist-disdain agenda. It hardly makes any sense at all. "far too much wealth transfer from companies to investors," It's their money, and it's absurd to keep it locked up in some arbitrary place - it's worse than 'neutral' in fact. Companies will respond by paying dividends, or parking the money in less efficient entities. There really is no upside to this policy.
- evandijk70 4y ago
  Share buybacks are used to avoid dividend taxes. It makes sense to tax them equally. Moreover, don't you think that paying dividends (in stock or in cash) are a better, more transparent way than share buybacks to distribute profits back to investors?
  - lotsofpulp 4y ago
    No, because stock buybacks are not free. Someone has to be willing to sell their stock to the company. It can be thought of as the owners willing to hold paying the owners willing to sell.
  - jasmer 4y ago
    It's not really our business if investors want to pay dividends or do share buybacks. One is a capital gain, the other has it's own taxation regime, there are already established taxation rules there.
andsoitis 4y ago
> far too much wealth transfer from companies to investors The investors (shareholders) own the company.
- Gibbon1 4y ago
  The government also limits the shareholders and managers personal liability. One has to ask what in it for the government?
  - JumpCrisscross 4y ago
    > One has to ask what in it for the government? A vibrant and productive tax base? Happy citizens? To be clear, I think the tax-treatment discrepancy between buybacks and interest is B.S. (More so than the income and capital gains discrepancy.)
- EdwardDiego 4y ago
  The company is a distinct entity. It's capital and assets are held apart from the investors for the traditional reasons. Are share buybacks always in the best interest of the company? I'd argue that they're nearly always in the best interest of investors only, especially when accomplished via selling assets, selling assets and then leasing them back, or just straight out taking on debt, that they harm the company, and accordingly, the employees of the company.
- MrMan 4y ago
  buybacks reward selling, not holding, I dont like that. dividends reward ownership
  - andsoitis 4y ago
    > buybacks reward selling, not holding Company value unchanged but fewer shares outstanding literally means value per share for holders goes up.
dhruval 4y ago
There is a tax deferral advantage to shareholders (esp. ones in a high tax bracket) from stock buy backs vs dividends. For investors with a low income (retirees for eg.) they can actually receive a good amount of dividends “tax free” (the company has already paid taxes on it so there is a dividend tax credit)
missedthecue 4y ago
If your cost of capital is cheap and your shares are even cheaper, surely a reorganization of your capital stack is in order? I struggle to apprehend the fanatic hatred of buybacks that's overwhelmed the national conversation in recent years. Buybacks seems like a rather benign and boring function of corporate finance to me. Comments online would have you believe an orphan was killed every time a share is repurchased.
- deleted 4y ago
  [deleted]
- phil21 4y ago
  > I struggle to apprehend the fanatic hatred of buybacks that's overwhelmed the national conversation in recent years. Buybacks seems like a rather benign and boring function of corporate finance to me. It's not much of a struggle for me, I tend to agree with those that "hate" stock buybacks but maybe not so vehemently. It's pretty simple to me. It breaks the social contract. The proper way to disburse excess funds that a company has no idea what to do with is via a dividend - which then gets taxed immediately. This is how investing is explained to the layman. Stock buybacks are simply a tax avoidance scheme, the other properties of them are line noise are not material. It's not very difficult to understand why someone on a W2 salary would find this to be yet another incredibly unfair scheme against their best interests in favor of the investor class.
  - Wyoming23 4y ago
    Of course the real problem is that dividends shouldn't be taxed in the first place. The entire economy operates on a rule of no double taxation, except for dividends. It's income that's already taxed at the corporate level, then taxed a second time when that post-tax income is transferred to the shareholders.
    - comte7092 4y ago
      >The entire economy operates on a rule of no double taxation Citation needed here. Nowhere is such a rule explicitly written, nor is it clear why it must be the case. Further, what you’re saying is incorrect, people often claim estate taxes to be “double taxation” as well. It’s not hard to see how many forms of taxes fall under this rubric. If corporate income taxes + taxes on dividends are “double taxation”, then couldn’t the same not be said about those same corporate income taxes and sales taxes? It’s honestly hard to think of any taxation regime that doesn’t include taxation at multiple points in a transaction chain. Taxes exist to severe a function, and that is to extract money from the economy in a just and efficient manner. It would seem that you are implying that “double taxation” in this instance somehow violates the former, though I don’t think most would agree with you.

klyrs 4y ago

It sounds like the companies doing the buyback pay 2% on the amount they spend on the buyback. It doesn't look like shareholders would be directly impacted, except for the sellers realizing gains in the transaction. That said, I'm not quite certain of who sells in a stock buyback.

Infinity315 4y ago
During a stock buy back they just buy stocks on the open market. They reduce the number of outstanding shares, i.e. number of shares that can be purchased. The value of a single stock is determined by (company value / number of outstanding shares). By reducing the number of outstanding shares, each individual share goes up in value.
- seanmcdirmid 4y ago
  Often doesn’t the stock go back out as grants to employees? So rather than create new shares, diluting share value, they buy stock to then grant to employees, so the stock buyback is essentially taxed as personal income.
  - erichocean 4y ago
    Yes, it's a way for companies with massive profits to route them to their employees (read: executives), not their shareholders.
    - Ekaros 4y ago
      And manipulate the stock prices to look to perform better than it should. They could just pay dividends, but then some argue those would be taxed at time where as buybacks are only if sold later at profit.
      - seanmcdirmid 4y ago
        Dividends are taxed twice, as corporate income then as personal income to whoever they are granted to (at least to Americans, other countries have different tax rules). A buy back is only taxed as personal income when granted to the employee.
        lotsofpulp 4y ago
        What about the capital gains tax for the entity the company is buying the share from?
        seanmcdirmid 4y ago
        If it is like a 401K fund, the tax is deferred (it will be treated income rather than capital gains later). But they also wouldn't have had to charge tax right away for dividends (dividends are re-invested into the fund, and taxed as income later).
      - JumpCrisscross 4y ago
        > manipulate the stock prices to look to perform better than it should They're taking actions that raise the stock price. That hardly counts as manipulation. (It would count as manipulation if the buyback were conveniently timed to coincide with share-price incentives.)
        seanmcdirmid 4y ago
        The money used for the buyback makes the company worth less, so it should be neutral if the share price was accurate. It never is of course.
  - JumpCrisscross 4y ago
    > doesn’t the stock go back out as grants to employees? I'd be curious to see a study supporting this claim.
    - seanmcdirmid 4y ago
      It’s definitely a common thing in publicly traded tech. Those stock grants have to come from somewhere, and simply creating new stock dilutes everyone shares. Though I’m not sure how often it happens.
      - JumpCrisscross 4y ago
        > stock grants have to come from somewhere, and simply creating new stock dilutes everyone shares This is how it works. It's why companies report an earnings per share on a fully-diluted basis.
        seanmcdirmid 4y ago
        It’s how it often works, but buybacks are an option to avoid diluting share price (issuing stock diluted share price, buying it back does the opposite, though should be neutral).
      - MrMan 4y ago
        but debt taken out to fund buybacks is also a form of dilution
sanjayio 4y ago
It sounds like shareholders won’t be directly impacted but companies deciding to do buybacks might decide otherwise with a tax. It’s marginal at 2% but imagine this hits 5-10%. Then buybacks might make less sense for a company. That will impact shareholders who are usually employees who have been working their asses off for years and have lucked out with a company that actually offers buybacks.
jasmer 4y ago
Shareholders are 100% paying this tax. Shareholders own the company; If the company pays X% tax, it really means the 'shareholders' are paying it. (Edit: For example the company has $200 in assets. They pay out $100 in a buyback, the remaining shareholders would have to pay the $2 out of their assets. This would technically play out in the valuation of the shares at the time of buyback.) Moreover, it will affect companies decision making for no obvious benefit to anyone. This is a total curve ball, I can't even fathom why the government is doing this, there is no obvious upside. It's a really odd things that 'share buybacks' are considered some kind of negative thing. They are a re-balancing financial activity for the most part. Money goes in, money comes out and goes elsewhere etc. - this is good. Edit: it's a bit like having a tax for taking cash out of a bank account. If the company needs the money for productive things, they probably would not be doing a buyback. The notion the gov. would want to inhibit money from moving from one spot where it's probably not being used efficiently, makes no sense. If the government needs to raise revenues, it would be far more rational to simply hike corporate taxes by some amount.
refurb 4y ago
It’s a silly law. They won’t do share buybacks and then distribute earnings via distributions or some other mechanism. It’s really odd law I’m guessing is just a populist move to get votes. There is nothing that makes stock buy backs any worse than other methods of distributing earnings. They could just pay out dividends directly instead. I have no idea what the intent of the law is other than “someone doesn’t like stock buy backs”.

jasmer 4y ago

So this is probably a bad policy almost irrespective where you are on the socialist/capitalist-disdain agenda. It hardly makes any sense at all. "far too much wealth transfer from companies to investors," It's their money, and it's absurd to keep it locked up in some arbitrary place - it's worse than 'neutral' in fact. Companies will respond by paying dividends, or parking the money in less efficient entities. There really is no upside to this policy.

evandijk70 4y ago
Share buybacks are used to avoid dividend taxes. It makes sense to tax them equally. Moreover, don't you think that paying dividends (in stock or in cash) are a better, more transparent way than share buybacks to distribute profits back to investors?
- lotsofpulp 4y ago
  No, because stock buybacks are not free. Someone has to be willing to sell their stock to the company. It can be thought of as the owners willing to hold paying the owners willing to sell.
- jasmer 4y ago
  It's not really our business if investors want to pay dividends or do share buybacks. One is a capital gain, the other has it's own taxation regime, there are already established taxation rules there.

andsoitis 4y ago

> far too much wealth transfer from companies to investors The investors (shareholders) own the company.

Gibbon1 4y ago
The government also limits the shareholders and managers personal liability. One has to ask what in it for the government?
- JumpCrisscross 4y ago
  > One has to ask what in it for the government? A vibrant and productive tax base? Happy citizens? To be clear, I think the tax-treatment discrepancy between buybacks and interest is B.S. (More so than the income and capital gains discrepancy.)
EdwardDiego 4y ago
The company is a distinct entity. It's capital and assets are held apart from the investors for the traditional reasons. Are share buybacks always in the best interest of the company? I'd argue that they're nearly always in the best interest of investors only, especially when accomplished via selling assets, selling assets and then leasing them back, or just straight out taking on debt, that they harm the company, and accordingly, the employees of the company.
MrMan 4y ago
buybacks reward selling, not holding, I dont like that. dividends reward ownership
- andsoitis 4y ago
  > buybacks reward selling, not holding Company value unchanged but fewer shares outstanding literally means value per share for holders goes up.

dhruval 4y ago

There is a tax deferral advantage to shareholders (esp. ones in a high tax bracket) from stock buy backs vs dividends. For investors with a low income (retirees for eg.) they can actually receive a good amount of dividends “tax free” (the company has already paid taxes on it so there is a dividend tax credit)

missedthecue 4y ago

If your cost of capital is cheap and your shares are even cheaper, surely a reorganization of your capital stack is in order? I struggle to apprehend the fanatic hatred of buybacks that's overwhelmed the national conversation in recent years. Buybacks seems like a rather benign and boring function of corporate finance to me. Comments online would have you believe an orphan was killed every time a share is repurchased.

deleted 4y ago
[deleted]
phil21 4y ago
> I struggle to apprehend the fanatic hatred of buybacks that's overwhelmed the national conversation in recent years. Buybacks seems like a rather benign and boring function of corporate finance to me. It's not much of a struggle for me, I tend to agree with those that "hate" stock buybacks but maybe not so vehemently. It's pretty simple to me. It breaks the social contract. The proper way to disburse excess funds that a company has no idea what to do with is via a dividend - which then gets taxed immediately. This is how investing is explained to the layman. Stock buybacks are simply a tax avoidance scheme, the other properties of them are line noise are not material. It's not very difficult to understand why someone on a W2 salary would find this to be yet another incredibly unfair scheme against their best interests in favor of the investor class.
- Wyoming23 4y ago
  Of course the real problem is that dividends shouldn't be taxed in the first place. The entire economy operates on a rule of no double taxation, except for dividends. It's income that's already taxed at the corporate level, then taxed a second time when that post-tax income is transferred to the shareholders.
  - comte7092 4y ago
    >The entire economy operates on a rule of no double taxation Citation needed here. Nowhere is such a rule explicitly written, nor is it clear why it must be the case. Further, what you’re saying is incorrect, people often claim estate taxes to be “double taxation” as well. It’s not hard to see how many forms of taxes fall under this rubric. If corporate income taxes + taxes on dividends are “double taxation”, then couldn’t the same not be said about those same corporate income taxes and sales taxes? It’s honestly hard to think of any taxation regime that doesn’t include taxation at multiple points in a transaction chain. Taxes exist to severe a function, and that is to extract money from the economy in a just and efficient manner. It would seem that you are implying that “double taxation” in this instance somehow violates the former, though I don’t think most would agree with you.