Long-term investors can defer capital gains tax until they sell, and therefore, there is a tax advantage for share repurchases over dividends.

Question

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When a company repurchases its own shares, it reduces the number of outstanding shares, which typically increases the value of each remaining share. This increase in value is not taxed until the shareholder sells the shares, providing a tax advantage for long-term investors. On the other hand, when a company pays a dividend, the recipient must pay taxes on the dividend income in the year it is received. Therefore, share repurchases have a tax advantage over dividends for long-term investors.

Long-Term Investors Can Defer Capital Gains Tax Until They Sell