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Buying a Dividend – Why You Are Overtaxed Each Time You Invest

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Introduction

While about 160 million Americans depend on the stock market for retirement, they remain largely unaware of the hidden fees and unjust taxation eroding their investments. In stark contrast, Wall Street insiders are not only aware of these fees but have a name for them: 'buying a dividend.' This article aims to demystify the concept of “buying a dividend,” explaining how it affects investors and highlighting the hidden costs and unjust taxation that is eating away at your returns.

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Understanding Buying a Dividend

To grasp the concept of buying a dividend, let's start with a simple analogy

Imagine you deposit $100 into your bank account. A few days later, you withdraw $3.00. This $3.00 withdrawal isn't taxable income; it's simply part of your initial deposit you've taken back from the bank. Initially, you had $100, and after the withdrawal, you still have $100 — $97 in the bank and $3.00 in your pocket.

The $3.00 withdrawal from your bank account is, therefore, NOT taxable income. Your money was moved from one place to another, and no income was earned as a result.

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The Mechanics of Buying a Dividend

The same principle applies when you purchase an income-producing security, such as a stock or investment fund that pays dividends and capital gains. Consider this scenario

  1. You buy a stock for $100 per share, knowing it will soon pay a $3.00 dividend.
     

  2. Out of your $100 investment, $97 goes towards buying the stock, and $3.00 is allocated for buying the upcoming dividend that is included in the $100 price you paid.
     

  3. When the dividend is paid, the stock price adjusts by dropping from $100 to $97, reflecting the payout. Simultaneously, you receive $3.00 as a dividend.
     

  4. After receiving the dividend, you're left with $97 worth of stock and $3.00 in cash, summing back to your initial $100 investment. Again, like the bank account example above, no income has been earned. Therefore, you should not incur a tax on the $3.00 dividend you received. It is merely a return of part of your initial investment. You put money into the security and the security returned some of the money you originally put in.

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Unjust Taxation

Unfortunately, this dividend is fully taxed by financial institutions as if it were income despite merely being a redistribution of part of your initial investment. This results in over-taxation because you are taxed on money that is not new income; it is just a return of part of your original investment.

Every time investors buy a stock or fund that pays dividends or capital gains, they face this unjust and unwarranted taxation. To levy an “income tax,” there must be income. As shown in the example, there is no income to be found, and according to the Internal Revenue Code, this transaction is not taxable.

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Calculating the Hidden Costs

Let's illustrate the hidden costs with a mathematical example

Suppose an investor purchased 1,000 shares of the $100 security in the previous example, assuming a combined state and federal tax rate of 33%. They would pay a $990 hidden fee and receive a tax return that overstates their income. To calculate the tax loss from buying a dividend, multiply the number of shares purchased by the dividend per share and then multiply the result by the combined state and federal tax rate.

Formula: Investor Loss = (number of shares purchased * income distribution per share) * (state + federal tax rate)

Example calculation for the example in the Mechanics of Buying a Dividend Section

(1,000 * $3.00) * (33%) = $990 investor loss

It is important to note that investment funds can pay multiple types of distributions. For example, an investment fund can pay dividends, short-term capital gains, and long-term capital gains. To calculate the total loss associated with your purchase, you must calculate the loss on the first distributions of each type and then add them together.

For example, in addition to the $3.00 dividend, let's assume this security will also pay a $2.00 short-term capital gain and a $4.00 long-term capital gain. To simplify the math, we assume our 33% tax rate applies to each distribution type even though short-term capital gains are taxed at higher ordinary income rates.

Image by Austin Distel

Example calculation for total loss

Dividend = (1,000 * $3.00) * (33%) = $990

Short-term capital gain = (1,000 * $2.00) * (33%) = $660

Long-term capital gain = (1,000 * $4.00) * (33%) = $1,320

Total Investor Loss = ($990 + $660 + $1,320) = $2,970
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The Financial Impact and Industry Resistance

We estimate that US-based investors incur approximately $131 billion annually in losses due to unjust taxation on buying dividends. This staggering number highlights the severity of the problem, which constitutes the biggest investor protection problem in history.

Despite acknowledging the harm caused to investors and the fact that a solution exists, the financial services industry is resisting the implementation of commercially available software that can address this issue. This resistance further exacerbates the ongoing problem, leaving millions of investors vulnerable to unnecessary financial losses. By bringing this issue to light, we aim to push for necessary changes and encourage the adoption of solutions that can protect investors' interests and enhance the fairness of the financial system.

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The Government is Legally Compelled to Act

Since the financial services industry is unwilling to protect their investors from over-taxation, despite their legal fiduciary duty to do so, the government must immediately step in to protect the American people from ongoing harm. The excessive taxation related to buying a dividend violates the constitutional right of 160 million people to be taxed fairly. This infringement undermines the principles of fairness and equity enshrined in the Constitution. By addressing this issue, the government fulfills its legal obligation to ensure that fiscal policies remain equitable, safeguarding citizens from unjust and oppressive taxation, which is illegal and erodes the quality of life of hundreds of millions of people annually.

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If you're concerned about hidden fees and over-taxation in your investments, join our Investor Protection Initiative to learn more and take action. Subscribe to our Substack and stay updated on the latest insights and strategies to protect your financial future.

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