Which of the following statements is true? A. Taxes on dividend income are paid when the stock is sold.

Which of the following statements is true?

A.      Taxes on dividend income are paid when the stock is sold.

B.      Taxes on dividend income are paid in the year that they are received

Answer: B. Taxes on dividend income are paid in the year that they are received

Dividend income is taxable in the year the dividends are received by the shareholder. When a company pays dividends to shareholders, those shareholders must include the dividend amount as part of their total income for tax purposes in that same year.

Unlike capital gains taxes, which are only paid when the stock is actually sold at a profit, taxes on dividends must be paid annually as the dividends are earned. Even if the stock is not sold, any dividends received are considered taxable income for that tax year .

Therefore, statement B is true. Taxes on dividend income are not deferred until the sale of the stock. Rather, they must be paid by the shareholder in the same year that the dividend payments are received, regardless of whether the underlying shares are sold or not.