Breakeven Tax Rate

DEFINITION of 'Breakeven Tax Rate'

A rate of tax above which it is unprofitable to engage in a transaction. After the tax is paid, there would not be enough profit or financial benefit for the parties involved to justify the time and effort required to transact business. The break even tax rate in and of itself is essentially a conceptual threshold; a rate below this rate would give investors or other parties incentive to engage in a transaction, whereas a rate above this will not. This rate is not a set numerical rate, such as the Social Security tax rate.

BREAKING DOWN 'Breakeven Tax Rate'

An example of a break even tax rate is illustrated in the following example:

Investor A owns 1,000 shares of stock in ABC Company, and the price is starting 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 he can either sell them now and pay tax on his 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.

Of course, 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 either way, regardless of whether he reports a short or long-term gain.

RELATED TERMS
  1. Effective Tax Rate

    The average rate at which an individual or corporation is taxed. ...
  2. Tax Rate

    The percentage at which an individual or corporation is taxed. ...
  3. Tax Base

    The assessed value of a set of assets, investments or income ...
  4. Direct Tax

    A tax that is paid directly by an individual or organization ...
  5. Tax Arbitrage

    The practice of profiting from differences between the way transactions ...
  6. Tax Liability

    The total amount of tax that an entity is legally obligated to ...
Related Articles
  1. Managing Wealth

    Investment Tax Basics For All Investors

    Nothing can be said to be certain, except death and taxes even in your investments.
  2. Personal Finance

    What is the Effective Tax Rate?

    The effective tax rate is the average rate at which an individual or corporation is taxed per year.
  3. Personal Finance

    Comparing Long-Term vs. Short-Term Capital Gain Tax Rates

    Learn about the difference between short- and long-term capital gains and how the duration of your investment can impact your tax liability.
  4. Personal Finance

    Capital Gains Tax 101

    Find out how taxes are applied to your investment returns and how you can reduce your tax burden.
  5. ETFs & Mutual Funds

    7 Ways to Create a Tax-Efficient Portfolio

    Taxes may be a necessary evil, but that doesn't mean they can't be reduced. Here's a host of smart moves today's investors can make.
  6. Personal Finance

    The History Of Taxes In The U.S.

    The number of taxes that we now consider a given did not always exist. Find out how they arose.
  7. Personal Finance

    Who Does The Current Tax Code Benefit?

    Are the non-workers benefiting from the current tax code in any way or is it the wealthy who are still getting the big breaks?
  8. Personal Finance

    Understanding Taxes

    Taxes are mandatory fees that individuals and corporations must pay to their governments.
  9. Personal Finance

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  10. Personal Finance

    What You Need To Know About Capital Gains And Taxes

    Find out how your profits are taxed and what to consider when making investment decisions.
RELATED FAQS
  1. What is the difference between income tax and capital gains tax?

  2. How does the marginal tax rate system work?

    The marginal tax rate is the rate of tax that income earners incur on each additional dollar of income. As the marginal tax ... Read Answer >>
  3. How does the effective tax rate for an individual differ from that of a corporation?

    Read about the effective tax rate for individuals when compared with the effective tax rate for corporations, including how ... Read Answer >>
  4. How are effective tax rates calculated from income statements?

    Learn how to read an income statement and how to find the information necessary to calculate a company's effective income ... Read Answer >>
  5. Is progressive tax the same thing as marginal tax rate?

    Learn how a marginal tax rate is a form of a progressive tax rate. Learn the pros and cons of such a tax policy and who may ... Read Answer >>
  6. What's the difference between the marginal tax rate system and a flat tax?

    Find out about the difference between marginal tax rates and flat taxes. Gain insights on both systems and the arguments ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center