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Comment by bogomipz | Hacker News Reader

>"Buybacks are at least much more tax effective than issuing dividends."

Why are buybacks much more tax effective? Is this due to the way the accounting is done on them?

Assuming an investor owns the stock in a taxable account, dividends are taxed at ordinary income whereas if the stock appreciates due to stock buybacks, it could be taxable as a long-term gain (if held for more than a year).

https://mebfaber.com/2016/05/02/much-dividends-costing/

>>> In a taxable account dividends could have cost you anywhere from 0.3% to over 3.0% in returns PER YEAR since 1974.

Interesting I always think of the "income vs capital gains" as a consideration for individual tax payers. I didn't realize it also pertained to corporate purchases of their own stock.

It does pertain to individual tax payers. Tax payers can either pay ordinary income on dividends or capital gains tax on the sale of share with increased value.

Even better is that as long as the shareholder holds, they have increased value, but can defer taxes.

Simplifying things quite a lot, say that you have a share in a stable company priced at $1000. During the year the company makes $50 per share in profits and the price gradually goes up to $1050. The company can pay a dividend: you get $50 and pay taxes on them (and your share is now worth $1000). The company could also use the money to buy its own shares: you still have a share worth $1050 and no tax is due (yet).

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