How are stock dividends treated for tax purposes?

Stock dividends are treated for tax purposes in a way that does not impose immediate tax liability upon the shareholder at the time they are received. When shareholders receive stock dividends, they simply increase their total number of shares owned without incurring additional taxable income in the year the dividends are distributed. This is distinct from cash dividends, which are generally taxable in the year they are received.

The underlying principle is that stock dividends are typically not realized gains; instead, they are seen as a reallocation of the company's equity. This means that unless the shareholder sells the additional shares obtained through the stock dividend, there is no taxable event. As such, the correct treatment acknowledges that stock dividends merely result in an increase in ownership percentage within the company without triggering an immediate tax consequence. The tax liability will arise only when shares are sold, potentially leading to capital gains taxation if the sale price exceeds the adjusted basis of the shares.