Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

When is tax due on a stock dividend?

1. At the time of receipt

2. Only when sold

3. At the end of the fiscal year

4. When the company delists

The correct answer is: Only when sold

Tax on stock dividends is due only when the shares are sold. This is because stock dividends are generally not taxed at the time they are received; instead, they are considered a return on investment. When a shareholder receives additional shares through a stock dividend, they typically do not realize any taxable gain at that moment. The key point is that tax liability is triggered when the holding is converted into cash through the sale of those shares. At this point, any gain or loss that results from the sale is considered for tax purposes. This aligns with the principle of tax on capital gains, which taxes the profit made from the sale of an asset, rather than taxing the asset at the time it is received. In contrast, the timing of tax considerations mentioned in other choices does not reflect the general taxation standards on stock dividends.