A taxable event is any event or occurrence that results in a tax liability. All investors or parties that pay taxes experience taxable events. Two examples of taxable events are if an investor receives dividends or realizes capital gains.
Although a party should focus on generating profits, it should also focus on limiting its tax liabilities. For example, suppose an investor owns a stock that pays dividends of 60 cents per share on a quarterly basis. The investor owns 1,000 shares of the stock and will receive $2,400 for the year and will be taxed on the dividends she receives.
Another taxable event is a capital gain. A capital gain occurs when there is an increase in the value of an investment in capital or real estate asset above a party's purchase price. A capital gain is unrealized until the asset is sold for a profit.
For example, suppose an investor owns a mutual fund and it has accumulated $200,000. The investor's initial investment in the mutual fund was $50,000. If the investor sells all of his holdings in the mutual fund, it will be considered a taxable event.
Suppose the investor wants to sell $150,000 worth of his shares in his mutual fund to buy a house. Since the shares of the mutual fund have appreciated in value, it would result in a taxable event. The investor calculates that he would owe a capital gains tax of $15,000 if he sells his shares and decides to hold off on buying a house. He is not taxed because the sale of his shares of the mutual fund did not occur.