Paying taxes on dividends even though your capital gains were $0?
"In the US, and in most other countries, dividends are considered income when paid, and capital gains/losses are considered income/loss when realized. This is called, in accounting, ""recognition"". We recognize income when cash reaches our pocket, for tax purposes. So for dividends - it is when they're paid, and for gains - when you actually sell. Assuming the price of that fund never changes, you have this math do to when you sell: Of course, the capital loss/gain may change by the time you actually sell and realize it, but assuming the only price change is due to the dividends payout - it's a wash." You are incorrect in saying that you have a capital gains of $0. You either have no capital gains activity, because you haven't realized it or you have an unrealized capital gains of -$10k. If you were to sell immediately after receiving the dividend you would end up as a wash investment wise - the 10k of dividend offsetting the 10k capital wash. Though due to different tax treatments of money you may be slightly negative with respect to taxes.  You are taxed when you receive the money. And you realized that 10k in dividends - even if you didn't want too.  In the future if this bothers you. You need to pay attention to the dividend pay out dates for funds. But then just after they payout a dividend and have drain their cash account. The issue is that you unknowingly bought 90k of stock and 10k of cash. This information is laid out in the fund documentation, which you should be reviewing before investing in any new fund. "I'd agree that this can seem a little unfair, but it's an unavoidable consequence of the necessary practicality of paying out dividends periodically (rather than continuously), and differential taxation of income and capital gains. To see more clearly what's going on here, consider buying stock in a company with extremely simple economics: it generates a certain, constant earnings stream equivalent to $10 per share per annum, and redistributes all of that profit as periodic dividends (let's say once annually). Assume there's no intrinsic growth, and that the firm's instrinsic value (which we'll say is $90 per share) is completely neutral to any other market factors. Under these economics, this stock price will show a ""sawtooth"" evolution, accruing from $90 to $100 over the course of a year, and resetting back down to $90 after each dividend payment. Now, if I am invested in this stock for some period of time, the fair outcome would be that I receive an appropriately time-weighted share of the $10 annual earnings per share, less my tax. If I am invested for an exact calendar year, this works as I'd expect: the stock price on any given day in the year will be the same as it was exactly one year earlier, so I'll realise zero capital gain, but I'll have collected a $10 taxed dividend along the way. On the other hand, what if I am invested for exactly half a year, spanning a dividend payment? I receive a dividend payment of $10 less tax, but I make a capital loss of -$5. Overall, pre-tax, I'm up $5 per share as expected. However, the respective tax treatment of the dividend payment (which is classed as income) and the capital gains is likely to be different. In particular, to benefit from the ""negative"" taxation of the capital loss I need to have some positive capital gain elsewhere to offset it - if I can't do that, I'm much worse off compared to half the full-year return. Further, even if I can offset against a gain elsewhere the effective taxation rates are likely to be different - but note that this could work for or against me (if my capital gains rate is greater than my income tax rate I'd actually benefit). And if I'm invested for half a year, but not spanning a dividend, I make $5 of pure capital gains, and realise a different effective taxation rate again. In an ideal world I'd agree that the effective taxation rate wouldn't depend on the exact timing of my transactions like this, but in reality it's unavoidable in the interests of practicality. And so long as the rules are clear, I wouldn't say it's unfair per se, it just adds a bit of complexity." How and why is this considered fair (and/or legal)? Let's use an analogy.  The issue is not fairness, it is just the rules. The assets you own and the cash you receive are reported differently. If the rules don't make sense, I suggest you hire an adviser that can teach you and help you get the most out of your investments. The issue for you seems to be the sequence of events. Presumably, there will be a gain in the fund. In one year, you have a fund worth $100,000 and the $8500 your netted from the $10,000 dividend. (Dividends are taxed at 15% for most of us. If your taxable income is under $38K single, it's $0) An $8500 net return for the year. Now, if there were no initial dividend, and at the end of a full year, your $100K grew to $110K, and then gave you the $10K dividend, you might not be so unhappy. Even on day 2, you now have a fund worth $90K with a basis of $100K, and the promise of future dividends or cap gains. When you sell, the first $10K of gain from this point will effectively be tax free due to this quick drop.  To directly answer the last few sentences, dividends and cap gains are different. And different still, for the way a fund processes them.
"You cannot get ""your investment"" out and ""leave only the capital gains"" until they become taxable at the long-term rate. When you sell some shares after holding them for less than a year, you have capital gains on which you will have to pay taxes at the short-term capital gains rate (that is, at the same rate as ordinary income).  As an example, if you bought 100 shares at $70 for a net investment of $7000, and sell 70 of them at $100 after five months to get your ""initial investment back"", you will have short-term capital gains of $30 per share on the 70 shares that you sold and so you have to pay tax on that $30x70=$2100. The other $4900 = $7000-$2100 is ""tax-free"" since it is just your purchase price of the 70 shares being returned to you.  So after paying the tax on your short-term capital gains, you really don't have your  ""initial investment back""; you have something less. The capital gains on  the 30 shares that you continue to hold will become (long-term capital gains) income to you only when you sell the shares after having held them for a full year or more: the gains on the shares sold after five months are taxable income in the year of sale." Firstly a stock split is easy, for example each unit of stock is converted into 10 units.  So if you owned 1% of the company before the stock split, you will still own 1% after the stock split, but have 10 times the number of shares.   The company does not pay out any money when doing this and there is no effect on tax for the company or the share holder. Now onto stock dividend… When a company make a profit, the company gives some of the profit to the share holders as a dividend; this is normally paid in cash.  An investor may then wish to buy more shares in the company using the money from the dividend.      However buying shares used to have a large cost in broker charges etc. Therefore some companies allowed share holders to choose to have the dividend paid as shares.   The company buys enough of their own shares to cover the payout, only having one set of broker charges and then sends the correct number of shares to each share holder that has opted for a stock dividend.  (Along with any cash that was not enough to buy a complete share.) This made since when you had paper shares and admin costs where high for stock brokers.   It does not make sense these days. A stock dividend is taxed as if you had been paid the dividend in cash and then brought the stock yourself. At the end of each calendar year the mutual fund company will send you a 1099 form. It will tell you and the IRS what your account earned. You will see boxes for: You will end up paying taxes on these, unless the fund is part of a 401K or IRA. These taxes will be due even if you never sold any shares. They are due even if it was a bad year and the value of your account went down. Most if not all states will levy an income tax yon your dividends and capital gains each year. When you sell your shares you may also owe income taxes if you made a profit. The actual taxes due is a more complex calculation due to long term vs short term, and what other gains or losses you have. Partial sales also take into account which shares are sold. "If a stock is trading for $11 per share just before a $1 per share dividend is declared, then the share price drops to $10 per share immediately following the declaration. If you owned 100 shares (valued at $1100) before the dividend was declared, then you still own 100 shares (now valued at $1000). Generally, if the dividend is paid today, only the owners of shares as of yesterday evening (or the day before maybe) get paid the dividend. If you bought those 100 shares only this morning, the dividend gets paid to the seller (who owned the stock until yesterday evening), not to you. You just ""bought a dividend:"" paying $1100 for 100 shares that are worth only $1000 at the end of the day, whereas if you had just been a little less eager to purchase right now, you could have bought those 100 shares for only $1000. But, looking at the bright side, if you bought the shares earlier than yesterday, you get paid the dividend.  So, assuming that you bought the shares in timely fashion, your holdings just lost value and are worth only $1000.  What you do have is the promise that in a couple of days time, you will be paid $100 as the dividend, thus restoring the asset value back to what it was earlier.  Now, if you had asked your broker to re-invest the dividend back into the same stock, then, assuming that the stock price did not change in the interim due to normal market fluctuations, you would get another 10 shares for that $100 dividend making the value of your investment $1100 again (110 shares at $10 each), exactly what it was before the dividend was paid. If you didn't choose to reinvest the dividend, you would still have the 100 shares (worth $1000) plus $100 cash. So, regardless of what other investors choose to do, your asset value does not change as a result of the dividend.  What does change is your net worth because that dividend amount is taxable (regardless of whether you chose to reinvest or not) and so your (tax) liability just increased." You did something that you shouldn't have done; you bought a dividend.  Most mutual fund companies have educational materials on their sites that recommend against making new investments in mutual funds in the last two months of the year because most mutual funds distribute their earnings (dividends, capital gains etc) to their shareholders in December, and the share price of the funds goes down in the amount of the per share distribution. These distributions can be taken  in cash or can be re-invested in the fund; you most likely chose the latter  option (it is often the default choice if you ignored all this because you are a newbie). For those who choose to reinvest, the number of shares in the mutual fund increases, but since the price of the shares has decreased, the net amount remains the same. You own more shares at a lower price than the day before when the price was higher but the total value of your account is the same (ignoring normal market fluctuations in the price of the actual stocks held by the fund. Regardless of whether you take the distributions as cash or re-invest in the fund, that money is taxable income to you (unless the fund is owned inside a 401k or IRA or other tax-deferred investment program).  You bought 56 shares at a price of $17.857 per share (net cost $1000). The fund distributed its earnings shortly thereafter and gave you 71.333-56= 15.333 additional shares. The new share price is $14.11. So, the total value of your investment is $1012, but the amount that you have invested in the account is the original $1000 plus the amount of the distribution which is (roughly) $14.11 x 15.333 = $216.  Your total investment of $1216 is now worth $1012 only, and so you have actually lost money. Besides, you owe income tax on that $216 dividend that you received.  Do you see why the mutual fund companies recommend against making new investments late in the year?  If you had waited till after the mutual fund had made its distribution, you could have bought $1000/14.11 = 70.871 shares and wouldn't have owed tax on that distribution that you just bought by making the investment just before the distribution was made. See also my answer to this recent question about investing in mutual funds. No such account exists as capital gains aren't realized until holdings are sold. For example: OR  Both scenarios would result in you owing the appropriate taxes on a $40 gain from the dividends.   The $100 gain or $100 loss that isn't realized (you haven't sold the stock) isn't accounted for until the year of sale. You pay taxes on capital gains when you realize your gains by selling the investment property.  Also, in the US, taxes on capital gains are computed at special rates depending on your current income level, and so when you realize your gains two years from now, you will pay taxes on the gains at the special rate then applicable to your income level for the year of sale. Remember also that the US Congress  can change the tax laws at any time between now and the time you sell your stocks, and so the rates you are looking at now may have changed too. "In financial theory, there is no reason for a difference in investor return to exist between dividend paying and non-dividend paying stocks, except for tax consequences.  This is because in theory, a company can either pay dividends to investors [who can reinvest the funds themselves], or reinvest its capital and earn the same return on that reinvestment [and the shareholder still has the choice to sell a fraction of their holdings, if they prefer to have cash]. That theory may not match reality, because often companies pay or don't pay dividends based on their stage of life.  For example, early-stage mining companies often have no free cashflow to pay dividends [they are capital intensive until the mines are operational]. On the other side, longstanding companies may have no projects left that would be a  good fit for further investment, and so they pay out dividends instead, effectively allowing the shareholder to decide where to reinvest the money. Therefore, saying ""dividend paying""/""growth stock"" can be a proxy for talking about the stage of life + risk and return of a company. Saying dividend paying implies ""long-standing blue chip company with relatively low capital requirements and a stable business"". Likewise ""growth stocks"" [/ non-dividend paying] implies ""new startup company that still needs capital and thus is somewhat unproven, with a chance for good return to match the higher risk"". So in theory, dividend payment policy makes no difference. In practice, it makes a difference for two reasons: (1) You will most likely be taxed differently on selling stock vs receiving dividends [Which one is better for you is a specific question relying on your jurisdiction, your current income, and things like what type of stock / how long you hold it]. For example in Canada, if you earn ~ < $40k, your dividends are very likely to have a preferential tax treatment to selling shares for capital gains [but your province and specific other numbers would influence this]. In the United States, I believe capital gains are usually preferential as long as you hold the shares for a long time [but I am not 100% on this without looking it up]. (2) Dividend policy implies differences in the stage of life / risk level of a stock. This implication is not guaranteed, so be sure you are using other considerations to determine whether this is the case.  Therefore which dividend policy suits you better depends on your tax position and your risk tolerance." "The dividend reinvestment won't change whether the dividends themselves are qualified or not for US income tax purposes.  It's still the holding period on the stock that matters.  If you bought stock in different lots, then you could have a situation where some of the dividends paid are qualified and some are not, but: For completeness, it's worth noting that some dividends cannot be ""qualified"" no matter how long you hold them, but if you've got an investment in a common corporate stock (vs. something more ""exotic""), then what's above should apply." You normally only pay taxes on the difference between the sale price and the cost basis of the asset. In your example, you would probably pay taxes on the $10 difference, not the full sale price of $110. If you paid a commission, however, you would be taxed on your gain minus the commission you paid. Since you held the asset for less than a year, you wouldn't pay the long-term capital gains rate of 20%; you'd be taxed on the capital gain as if it were ordinary income, which depends on your federal income tax bracket. Also, littleadv makes a good point about the implications of buying the asset with after-tax funds too, so that's another part of the equation to consider as well. "Summary: The corporation pays 33.3% tax on dividends it receives and gets a tax refund at the same rate when it pays dividends out. According to http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/TaxRates/Federal-and-Provincial-Territorial-Tax-Rates-for-Income-Earned-CCPC-2015-Dec-31.pdf the corporate tax rates for 2015 are: According to page 3: The federal and provincial tax rates shown in the tables apply to investment income   earned by a CCPC, other than capital gains and dividends received from Canadian   corporations. The rates that apply to capital gains are one-half of the rates shown in   the tables. Dividends received from Canadian corporations are deductible in computing   regular Part I tax, but may be subject to Part IV tax, calculated at a rate of 33 1/3%. If I understand that correctly, this means that a Corporation in Quebec pays 46.6% on investment income other than capital gains and dividends, 23.3% on capital gains and 33.33% on dividends. I'm marking this answer as community wiki so anyone can correct these numbers if they are incorrect. UPDATE: According to http://www.pwc.com/ca/en/tax/publications/pwc-facts-figures-2014-07-en.pdf page 22 the tax rate on taxable dividends received from certain Canadian corporations is 33 1/3%. Further, this is refunded to the corporation through the ""refundable dividend tax on hand"" (RDTOH) mechanism at a rate of $1 for every $3 of taxable dividends paid. My interpretation is as follows: if the corporation receives $100 of dividends from another company, it pays $33.33 tax. If that corporation then pays out $100 of dividends at a later time, it receives a tax refund of $33.33. Meaning, the original tax gets refunded. Note the first line is for the 2015 tax year while the second link is for the 2014 tax year. The numbers might be a little different but the tax/refund process remains the same." "There are probably many correct answers to this question, but for most people, the main reason is qualified dividends. To be a qualified dividend (and therefore eligible for lower tax rates), the dividend-paying stock or fund must be held for ""more than 60 days during the 121-day period that begins 60 days before the ex-dividend date"". Since many stocks and funds pay out dividends at the end of the year, that means it takes until mid- to late February to determine if you held them, and therefore made the dividend qualified. Brokerages don't want to send out 1099s in January and then possibly have to send out revised versions if you decide to sell something that paid a dividend in December that otherwise would have been qualified." I think the answer you are looking for is:  You are not taxed on the original basis (purchase cost) of your investment.  If you pay $30 a share, and sell at $35, the $5 per share gain is taxable at time of sale.  But the $30 basis cost doesn't enter into tax calculations at all.  (So it's important to keep good records on your investments and how much you paid for them at purchase.) (I'm assuming the tag of United-states is accurate) Yes, the remaining amount is tax free -- at the current price.  If you sell at exactly the original price, there is no capital gain, no capital loss.  So you've already payed the taxes. If you sell and there is a capital gain of $3000, then you will pay taxes on the $3000.  If 33% is your marginal tax rate, and if you held the stock for less than a year, then you will keep $7000 and pay taxes of $1000.  Somehow, I doubt your marginal tax rate is 33%. If you hold the stock for a year after eTrade sold some for you to pay taxes, then you will pay 15% on the gain -- or $450. eTrade sold the shares to pay the taxes generated by the income.  Yes, those shares were considered income.  If you sell and have a loss, well, life sucks.  However, if you sell something else, you can use the loss to offset the other gain.  So if you sell stock A for a loss of $3000, and sell stock B at a gain of $4000, then you pay taxes on the net of $1000. A good way to find the rates of rental prices is to look what other landlords are charging for similar properties in your area. The proper investigation of property rental market should be make by using property listing platforms.  The other method is online rent calculator. There are a bunch of them on the Web. Briefly speaking, the rent calculator uses industry data to look at the typical rent you might expect from a property in a post code. Remember that the rent you charge has to be at least equal to the cost of your monthly mortgage bill. When you’re deciding what to charge, don’t forget to factor in an estimate of repair costs, taxes, homeowners association fees and insurance.