Breakeven Tax Rate

AAA

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.

INVESTOPEDIA EXPLAINS '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. Breakeven Price

    1. The amount of money for which an asset must be sold to cover ...
  2. Income Tax

    A tax that governments impose on financial income generated by ...
  3. Personal Finance

    All financial decisions and activities of an individual, this ...
  4. Taxes

    An involuntary fee levied on corporations or individuals that ...
  5. Payroll Tax

    Tax an employer withholds and/or pays on behalf of their employees ...
  6. Prime Rate

    The interest rate that commercial banks charge their most credit-worthy ...
Related Articles
  1. Solutions For Concentrated Positions
    Investing Basics

    Solutions For Concentrated Positions

  2. When To Sell A Mutual Fund
    Mutual Funds & ETFs

    When To Sell A Mutual Fund

  3. Using Tax Lots: A Way To Minimize Taxes
    Taxes

    Using Tax Lots: A Way To Minimize Taxes

  4. Capital Gains Tax 101
    Taxes

    Capital Gains Tax 101

comments powered by Disqus
Hot Definitions
  1. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  2. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  3. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  4. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  5. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
  6. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
Trading Center