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. Taxes

    An involuntary fee levied on corporations or individuals that ...
  2. Personal Finance

    All financial decisions and activities of an individual or household, ...
  3. Breakeven Price

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

    A tax that governments impose on financial income generated by ...
  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 Articles
  1. Taxes

    Capital Gains Tax 101

    Find out how taxes are applied to your investment returns and how you can reduce your tax burden.
  2. Investing Basics

    Solutions For Concentrated Positions

    Investopedia explains various tactics for divesting your overexposure to any one stock.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. Fundamental Analysis

    The Evolution of Obamacare Since Its Inception

    Find out whether the Patient Protection and Affordable Care Act, also known as Obamacare, has lived up to its lofty projections from 2010.
  8. Mutual Funds & ETFs

    The 4 Best Lord Abbett Mutual Funds

    Discover the four best mutual funds administered and managed by Lord, Abbett & Co., LLC that offer investors a wide variety of investment strategies.
  9. Economics

    Understanding Cost-Volume Profit Analysis

    Business managers use cost-volume profit analysis to gauge the profitability of their company’s products or services.
  10. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
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 >>
  4. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  5. How do I file taxes for income from foreign sources?

    If you are a U.S. citizen or resident alien, your income (except for amounts exempt under federal law), including that which ... Read Full Answer >>
  6. How Long Should I Keep My Tax Records?

    The Internal Revenue Service (IRS) has some hard and fast rules regarding how long taxpayers should keep their tax records. As ... Read Full Answer >>
Hot Definitions
  1. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  2. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  3. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  4. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
  5. Godfather Offer

    An irrefutable takeover offer made to a target company by an acquiring company. Typically, the acquisition price's premium ...
Trading Center