Buying a Dividend – Why You Are Overtaxed Each Time You Invest
The little-known market structure problem that is eroding your net worth.
While about 160 million Americans depend on the stock market for retirement, they remain largely unaware of the hidden fees and unjust taxation eroding their investments. In stark contrast, Wall Street service providers are not only aware of these fees but have a name for them: ‘buying a dividend.’ The information presented below and in the downloadable white paper aims to demystify the concept of “buying a dividend,” explaining how it affects investors and highlighting the hidden costs and unjust taxation that is eating away at your returns.
Understanding Buying a Dividend
To grasp the concept of buying a dividend, let’s start with a simple analogy
Imagine you deposit $100 into your bank account. A few days later, you withdraw $3.00. This $3.00 withdrawal isn’t taxable income; it’s simply part of your initial deposit you’ve taken back from the bank. Initially, you had $100, and after the withdrawal, you still have $100 — $97 in the bank and $3.00 in your pocket.
The $3.00 withdrawal from your bank account is, therefore, NOT taxable income. Your money was moved from one place to another, and no income was earned as a result.
You buy a stock for $100 per share, knowing it will soon pay a $3.00 dividend. Out of your $100 investment, $97 goes towards buying the stock, and $3.00 is allocated for buying the upcoming dividend that is included in the $100 price you paid. When the dividend is paid, the stock price adjusts by dropping from $100 to $97, reflecting the payout. Simultaneously, you receive $3.00 as a dividend. After receiving the dividend, you’re left with $97 worth of stock and $3.00 in cash, summing back to your initial $100 investment. Again, like the bank account example above, no income has been earned.
Result = Unjust Taxation
Unfortunately, this dividend is fully taxed by financial institutions as if it were income despite merely being a redistribution of part of your initial investment. This results in over-taxation because you are taxed on money that is not new income; it is just a return of part of your original investment.
Every time investors buy a stock or fund that pays dividends or capital gains, they face this unjust and unwarranted taxation. To levy an “income tax,” there must be income. As proven in the example above, there is no income to be found, and according to the Internal Revenue Code, this “return of capital” transaction should not be taxed.
Calculating Unjust Taxation
Let’s illustrate the hidden costs with a mathematical example:
Suppose an investor purchased 1,000 shares of the $100 security in the previous example. In addition to a $3.00 per share dividend we will assume that this security is an investment fund that will also pay a $2.00 short-term capital gain and a $4.00 long-term capital gain. We will also assume the state & federal combined tax rate for the dividend and long-term capital gain is 25%, and 42% for the short-term capital gain.
You must calculate a tax loss for each type of distribution — the dividend, short-term capital gain and long-term capital gain and then add them all together. To calculate the tax loss for each distribution, multiply the number of shares purchased by the estimated distribution per share at the time of purchase and then multiply the result by the combined state and federal tax rate for the specific distribution type. See the formula below.
Total Loss Calculations
2) Short-term capital gain = (1,000 * $2.00) * 42% = $840
3) Long-term capital gain = (1,000 * $4.00) * 25% = $1,000
Skip the Complex Calculations – Use Our Free DistributionRisk Calculator
Start for Free
No Credit Card Required
Free White Paper: Understand Why DistributionRisk Management Increases After-Tax Returns and Buying Power
Financial Impact and Industry Resistance
We estimate that US-based investors incur approximately $131 billion annually in losses due to unjust taxation on buying dividends. This staggering number highlights the severity of the problem, which constitutes the biggest investor protection problem in history.
Despite acknowledging the harm caused to investors and the fact that a solution exists, many strategically important companies in the financial services industry are reluctant to implement commercially available software that can address this issue and protect the investors they serve.
Every Investor is Owed 3+ Years of Tax Refunds – Ongoing Unjust Taxation is Unconstitutional
The over-taxation of investors due to misreported dividends and capital gains violates both the Fifth and Fourteenth Amendments of the US Constitution. The Fifth Amendment prohibits the federal government from taking private property without due process or just compensation, while the Fourteenth Amendment extends these protections to state actions. Taxing income that should be classified as a non-taxable return of capital constitutes an unconstitutional taking of property.
Under 26 U.S. Code § 6402(a), taxpayers who have overpaid are legally entitled to a refund from the IRS. Investors affected by these systemic issues should claim their refunds, as the government has a legal obligation to return improperly collected taxes.
Don’t just stand by. Get involved and make your voice heard. Learn how you can be part of the Investor Protection Initiative and help drive change.
Contact us —