Short Answer 
Stock dividends are payments made to shareholders from a company’s profits, reflecting its financial success and commitment to investors. These dividends are taxable income that must be reported in the year received, and taxes are based on the distributed after-tax profits.
Step 1: Understand Stock Dividends
A stock dividend is a share of a company’s profits that is paid out to shareholders. This distribution of profits demonstrates a company’s success and its commitment to rewarding investors. When a company declares a dividend, it essentially allocates a portion of its earnings to those who hold its stock, making it a direct payment to you based on the company’s performance.
Step 2: Recognize the Tax Implications
Dividends are considered taxable income because they represent earnings that must be reported in the year they are received. Unlike capital gains, which are only taxed when a stock is sold, dividends require you to report the income on your tax return immediately. This reflects the corporation’s distribution of earnings and highlights the company’s responsibility to share its profits with investors.
Step 3: Report Dividends on Your Taxes
When you receive dividends, you need to include them as part of your income on your tax return. This income is taxed in the year it is received, meaning you cannot postpone or defer the tax. To summarize the key points regarding taxation of stock dividends:
- Dividends are disbursements of profit made after corporate taxes.
- They reflect the company’s allocation of after-tax profits to shareholders.
- Tax is imposed on this income based on the year it is received.