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Listener Email: Tax Treatment of Dividends From Private Company


Over the last month, we have had a few listeners email questions to us at info@vanwiefinancial.com, and this is one that I recently asnwered on the radio.  

Carlos wrote to us and told us about an investment he had made in a microbrewery a few years ago during a venture capital “A” seed round. As it turns out, this microbrewery has done extremely well, and his investment has grown to a point where the company is now paying him dividends quarterly.  His questions was how these dividends would dividends would be taxed.  Are they qualified dividends, which are taxed as capital gains, or are they taxed as ordinary income?  Well, I have to first make the disclaimer that I am not a CPA, and if you are in this situation you should always check with your CPA.  However, I do know a little bit about these things, and I did check with a couple of CPAs, and it appears that these dividends would get treated as capital gains.

The great thing about getting capital gains treatment on this money is that the top rate on capital gains is 23.8%, and the lowest rate is 0%, depending on your tax bracket.  On ordinary income, you can be taxed at over 40%, depending on your taxable income. 

The rules for qualified dividends state that they must be a US company, which this is.  The investment must be held for 61 days before the dividend is paid, and then 60 days after the dividend is paid.  Carlos meets this criteria as long as he downs't sell his investment, so I don’t see any reason this shouldn’t receive the capital gains treatment.