Short Answer 
Stock dividends are payments made by corporations to shareholders, reflecting profits and rewarding ownership. These dividends are taxable as they are considered income received in the year declared, unlike capital gains which are taxed only upon realization. The taxation is based on the premise that dividends are profit distributions after corporate taxes have been paid.
Step 1: Understanding Stock Dividends
A stock dividend refers to a payment made by a corporation to its shareholders, representing a portion of its profits. When a company declares a dividend, it signifies its success and commitment to share earnings with stockholders. This distribution can be in cash or additional shares, essentially rewarding investors for their ownership in the company.
Step 2: Tax Implications of Dividends
The key factor making stock dividends taxable is that they represent income that must be reported in the year they are received. Unlike capital gains, which only incur tax when realized upon selling an asset, dividends are taxed contemporaneously. If a company declares a dividend, shareholders must include this as income when filing their taxes for the year, regardless of whether they actually sell any shares.
Step 3: Reasons for Taxation
There are several reasons why stock dividends are subject to taxation:
- The dividends are seen as disbursements of profit to shareholders.
- They are considered earnings distributed after corporate taxes have already been paid.
- The IRS requires that taxes be levied on the income in the year it is received, ensuring that companies’ success translates into taxable income for investors.