If both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of tax is different because:
A) Capital gains are actually taxed, while dividends are taxed on paper only
B) Dividends are taxed when distributed while capital gains are deferred until the stock is sold
C) Both dividends and capital gains are taxed every year
D) Both A and C

Question

Quizplus · Accepted Answer

Dividends are taxed on an annual basis when distributed, while capital gains taxes are deferred until the stock is sold. This means that investors have greater control over their tax liabilities with capital gains because they can choose when to realize them, whereas with dividends, taxes are due every year. Therefore, the effect of tax is different even though both are taxed at the same rate. Option A is incorrect because both dividends and capital gains are actually taxed. Option C is incorrect because capital gains taxes are not levied every year. Option D is incorrect because dividends are not taxed on paper only, and capital gains are not taxed every year.

If Both Dividends and Capital Gains Are Taxed at the Same