In comparison to dividends, what advantage do share repurchases have in terms of taxation?

Share repurchases offer a distinct tax advantage compared to dividends primarily because they are not subject to the same double taxation structure. When a company pays dividends to its shareholders, those dividends are taxed at both the corporate level (as part of the company's profits) and again at the individual level (when shareholders receive the payout). This results in a higher overall tax burden on dividend income.

On the other hand, when a company engages in share buybacks, the company uses its profits to repurchase its own shares from the market. This action does not trigger a tax event at the corporate level, as those repurchased shares are effectively retired, reducing the total number of outstanding shares. Consequently, any gains realized by shareholders from the increase in share price following the buyback are taxed only when the shares are sold by the shareholder, allowing for potentially more favorable long-term capital gains tax treatment compared to ordinary income tax rates that apply to dividends.

This structural difference in the taxation of dividends versus share repurchases makes the latter an attractive option for companies looking to return capital to shareholders while minimizing the tax burden associated with such actions.