Taxation of liquidating dividends


While regular dividends are taxable, liquidating dividends are not taxable since they are merely the return of the shareholder's investments.

Companies will issue IRS Form 1099-DIV, which clarifies the tax implications of the distribution.

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The capital gain is treated as long-term or short-term depending on whether you owned the shares for longer than a year.

If you purchased the stock at different times, divide the dividends into short-term and long-term proportionally, based on when each block of stock was acquired.

The following entry is required: Cash Paid = Shares of Common Stock x Dividend = 800,000 x $2.00, or $1,600,000 The journal entry to record the transaction would be: In the above example, shareholders would need to be informed that $400,000 / 800,000, or $0.50 per share were regular dividends, while $1.50 per share represents a liquidating dividend.

When a company has more liabilities than assets, equity is negative and no liquidating distribution is made at all.

Only the amount that exceeds the taxpayer's basis in the stock is capital; this is taxed as a capital gain.