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.

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.



comments powered by Disqus
Hot Definitions
  1. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed.
  2. Gilt-Edged Switching

    The selling and repurchasing of certain high-grade stocks or bonds to capture profits. Gilt-edged switching involves gilt-edged security, which can be high-grade stock or bond issued by a financially stable company such as the Blue Chip companies or by certain governments.
  3. Master Limited Partnership - MLP

    A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture.
  4. Class Action

    An action where an individual represents a group in a court claim. The judgment from the suit is for all the members of the group (class).
  5. Retail Sales

    An aggregated measure of the sales of retail goods over a stated time period, typically based on a data sampling that is extrapolated to model an entire country. In the U.S., the retail sales report is a monthly economic indicator compiled and released by the Census Bureau and the Department of Commerce.
  6. Okun's Law

    The relationship between an economy's unemployment rate and its gross national product (GNP). Twentieth-century economist Arthur Okun developed this idea, which states that when unemployment falls by 1%, GNP rises by 3%. However, the law only holds true for the U.S.
Trading Center