Breakeven Tax Rate
Breakeven tax rate is a tax rate above what is not profitable to engage in a transaction. An average tax rate is the ratio of the total amount of taxes paid to the tax base and a marginal tax rate is the tax rate an individual would pay on one additional dollar of income. Breakeven tax rate is not a set numerical rate, like the Social Security tax rate. Therefore, anything below this rate would give investors or other parties incentive to engage in a transaction, whereas a rate above the breakeven tax rate would not. The investor has held the shares for nearly a year, which means that the investor can either sell them now and pay tax on the gain as ordinary income, or wait for the one-year holding period date and then sell and pay tax at the lower capital gains rate.
What is the Breakeven Tax Rate
Breakeven tax rate is a tax rate above what is not profitable to engage in a transaction. In other words, the breakeven tax rate is the rate at which it would neither be advantageous or disadvantageous for a company to conduct a certain transaction. A breakeven tax rate allows people to examine the transaction rather than tax incentives.
BREAKING DOWN Breakeven Tax Rate
Breakeven tax rate is not a set numerical rate, like the Social Security tax rate. The breakeven tax rate in and of itself is essentially a conceptual threshold. When taxes rise above the breakeven rate, there would not be enough profit or financial benefit for the parties involved to justify the time and effort required to transact business. Therefore, anything below this rate would give investors or other parties incentive to engage in a transaction, whereas a rate above the breakeven tax rate would not.
A tax rate is the ratio, usually expressed in a percentage, at which a person or business is taxed. There are several methods used to present a tax rate such as statutory, average, marginal and effective. These rates can also be presented using different definitions applied to a tax base. A statutory tax rate is the legally imposed rate. An average tax rate is the ratio of the total amount of taxes paid to the tax base and a marginal tax rate is the tax rate an individual would pay on one additional dollar of income.
An Example of Breakeven Tax Rate
Say investor A owns 1,000 shares of stock in ABC Company, and the price starts to decline. He originally paid $25 per share for the entire lot, and the stock is now trading at about $100 per share. However, a major financial crisis has hit the company and the share price is starting to fall rapidly. The investor has held the shares for nearly a year, which means that the investor can either sell them now and pay tax on the gain as ordinary income, or wait for the one-year holding period date and then sell and pay tax at the lower capital gains rate. But of course, paying a higher rate on stock sold at $75 per share is probably better than waiting for the stock to fall to $50 per share and then paying a lower rate on less gain. The movement of the stock price will ultimately determine which path is better, but there will be a stock price at which the investor will come out the same regardless of whether they report a short- or long-term gain.
Related terms:
Breakeven Point (BEP)
In accounting and business, the breakeven point (BEP) is the production level at which total revenues equal total expenses. read more
Capital Gains Tax
A capital gains tax is a levy on the profit that an investor gains from the sale of an investment such as stock shares. Here's how to calculate it. read more
Capital Gain
Capital gain refers to an increase in a capital asset's value and is considered to be realized when the asset is sold. read more
Convertible Preferred Stock and Example
Convertible preferred stock is a hybrid security that gives holders the option to convert their preferred stock into common shares after a defined date. read more
Dividend Yield
The dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price. read more
Federal Income Tax
In the U.S., the federal income tax is the tax levied by the IRS on the annual earnings of individuals, corporations, trusts, and other legal entities. read more
Marginal Tax Rate
The marginal tax rate is the tax rate you pay on an additional dollar of income. read more
Short Selling : What Is Shorting Stocks?
Short selling occurs when an investor borrows a security, sells it on the open market, and expects to buy it back later for less money. read more
Social Security
Social Security is a federally run insurance program that provides benefits to many American retirees, their survivors, and workers who become disabled. read more