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If a company announces special dividend e.g. costco for $14 per share, is it better to hold or to sell? I am assuming that the share price will go up by roughly $14 after the announcement? So is either holding or selling roughly the same profit?

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Special dividends can contain capital gains, ordinary income, and/or return of capital. The return of capital component lowers your cost basis and you aren't taxed until you sell your shares. However, the other components are taxable when received.

If you have little to no capital gain in your position, you're in a higher tax bracket, and the taxable component are large, it might make sense to sell before the special dividend in order to avoid the taxable event.

I would not assume that share price will go up will go up by roughly $14 after the announcement because $14 per share is being removed from the company's coffers.

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In theory a dividend payment that has already been announced has an equal impact on the price of the stock. One consideration, however, would be the tax treatment of the dividend vs the tax treatment of the gain, depending on your jurisdiction. In some cases, you may have a better net result receiving the dividend, and in some cases you may have a better net result selling beforehand and having a larger capital gain.

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  • Suppose the investor has a better net result receiving capital gains (instead of dividends) but also intends to become a shareholder again after the dividend is paid. How can the investor avoid adverse prices when buying again after the dividend? Does the investor use options for this?
    – Flux
    Oct 1 '20 at 0:27
  • @Flux tax on dividends would be paid on the amount of the dividends only. Tax on the capital gain would generally be paid on the full increase in value since the time of purchase. In theory if the price of stock was exactly flat for the whole period of ownership, and the capital gain to be recognized was equal to the amount of dividend, I guess you could sell the share beforehand, recognize the capital gain, and then buy back. Seems pretty odd, however. If you also hedged your 'rebuying' price through use of options or similar, transaction costs would likely kill the tax savings. Oct 1 '20 at 0:50
  • @Flux Never heard of someone doing this but I assume it has been done from time to time. Typically though, dividends are individually too small for this to be worthwhile. There'd need to be a pretty specific fact pattern for it to make sense. Oct 1 '20 at 0:50
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    In the US stock market, some non-resident aliens have 0% capital gains tax and 30% dividend tax. These non-resident aliens would be interested in taking capital gains in place of dividends. I have a question that asks about this: Can non-resident aliens avoid taxes on dividends?.
    – Flux
    Oct 1 '20 at 0:58

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