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. Taxes

    An involuntary fee levied on corporations or individuals that ...
  3. Income Tax

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

    All financial decisions and activities of an individual, this ...
  5. Prime Rate

    The interest rate that commercial banks charge their most credit-worthy ...
  6. Payroll Tax

    Tax an employer withholds and/or pays on behalf of their employees ...
RELATED FAQS
  1. What are unrealized gains and losses?

    An unrealized loss occurs when a stock decreases after an investor buys it, but he or she has yet to sell it. If a large ... Read Full Answer >>
  2. How are realized profits different from unrealized or so-called "paper" profits?

    When buying and selling assets for profit, it is important for investors to differentiate between realized profits and gains, ... Read Full Answer >>
  3. How do I figure out my cost basis on a stock investment?

    The cost basis of any investment is the original value of an asset adjusted for stock splits, dividends and capital distributions. ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Solutions For Concentrated Positions

    Investopedia explains various tactics for divesting your overexposure to any one stock.
  2. Mutual Funds & ETFs

    When To Sell A Mutual Fund

    Unhappy with your mutual fund's returns and thinking of investing elsewhere? Read this article first.
  3. Taxes

    Using Tax Lots: A Way To Minimize Taxes

    The method of identifying cost basis can help you to get the most out of reduced tax rates.
  4. Taxes

    Capital Gains Tax 101

    Find out how taxes are applied to your investment returns and how you can reduce your tax burden.
  5. Taxes

    Capital Gains Tax Cuts For Middle Income Investors

    Find out how TIPRA plans to slash taxes for those in the 10-15% tax bracket.
  6. Active Trading

    Seek Out Past Losses To Uncover Future Gains

    Tax loss carry-forwards can help reduce the tax burden of owning a profitable fund.
  7. Savings

    How Microeconomics Affects Everyday Life

    Microeconomics is the study of how individuals and businesses make decisions to maximize satisfaction. Microeconomic principles can describe many everyday experiences. We use renting a New York ...
  8. Taxes

    Switzerland's Declining Tax Haven Appeal

    Switzerland's tax haven allure is being threatened by efforts by the US and other governments to make Swiss banks give up their much-vaunted secrecy.
  9. Taxes

    Are You Missing Out On These Tax Exemptions?

    To lower your tax bill, make sure that you're taking all the exemptions that apply to you.
  10. Investing

    What's a Run Rate?

    Run rate is a term used to denote annualized earnings extrapolated from a shorter time frame. Management uses the run rate to estimate future revenues.

You May Also Like

Hot Definitions
  1. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  2. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  3. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  4. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  5. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  6. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
Trading Center