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> In practice, buybacks can be used to create what is effectively a shareholder dividend in a more tax-advantaged way. Whereas with dividends, they are taxed
by eru 10mo ago
> In practice, buybacks can be used to create what is effectively a
shareholder dividend in a more tax-advantaged way. Whereas with dividends,
they are taxed as income, and this is realized immediately. With buybacks,
they are taxed as capital gains, but crucially the gains are not realized
until the asset is sold. This could be indefinitely far in the future, so
it's more capital efficient. It has the added benefit that it helps pump
the token, and imo this is kind of cute because it marries both the
fundamental and speculative aspects.
This depends a lot on jurisdiction.
Some jurisdictions give you a certain amount of dividend income tax free. Some jurisdictions tax your capital gains even when they aren't realised. Lots of other variants exist.
- takinola 10mo agoWhich jurisdictions tax unrealized capital gains? Asking for a friend so I can avoid passing through.
- rtsang1 10mo agoI don't know if this counts, but I believe Norway taxes unrealized gains (indirectly) via wealth tax. All stock value is on the chopping block come tax time. I doubt this is a common thing. Whereas the other case (dividends tax credit) is far more common. It impacts those of us in Canada. Our government disincentivizes buybacks and encourages dividends instead. Typically, if you're in a low income bracket, and have investments brewing for decades (with high amounts of unrealized gain) in an unregistered account, it is preferable to get dividends over buybacks.
- eru 10mo agoDenmark is one of them. Germany has something similar. But you can ask your friendly neighbourhood LLM for details on the world's jurisdictions to get a complete list.
- lxgr 10mo agoGermany doesn't tax actual unrealized gains. They do tax foreign accumulating ETFs, but those really just dress up dividends to look a bit like unrealized capital gains to brokerages and, in the past, tax authorities.
- eru 10mo agoBtw, I wonder why companies bother with dividends at all, when for most of their shareholders buybacks have tax advantages. (Economically, the two are the same.)
- throw-qqqqq 10mo agoDenmark taxes unrealized gains in accumulating funds, unless they are on the “exception-list” (SKATs positivliste) or you use the tax advantaged “aktiesparekonto”. If you buy regular stocks in a regular brokerage account, you do not incur taxes before selling (with profit). Same for dividend-distributing ETFs.