The tax treatment for corporate stocks and bonds plays a crucial role in the financial market. When a corporation issues stocks and bonds, individuals who invest in them expect a return on their investment. According to Wang (2021), over half of all Americans own stocks. Selling these investments at a higher price than their purchase price results in a capital gain, which the federal government can tax to raise revenue. The origins of capital gains taxation can be traced back to 1913, when the Revenue Act of 1913 was enacted.

Initially, capital gains were considered ordinary income and taxed at ordinary rates. However, during World War I, ordinary tax rates increased to as much as 77 percent, negatively impacting investors' participation in the stock and bonds exchange. As a result, the Revenue Act of 1921 introduced a distinction between long-term and short-term capital gains, with long-term capital gains taxed at an alternative rate of 12.5 percent, and short-term capital gains taxed at ordinary rates (Adams, 2021).

The Revenue Act of 1934 provided significant benefits for investors, allowing them to exclude a certain percentage of realized capital gains based on their investment holding period. For instance, in 1934, gains on assets held for one year could be excluded up to 20 percent, while those for assets held for ten years could be excluded up to 70 percent (Auten, 1999). The capital gains tax rates changed several times from 1934 to 1941, ranging from 17.5 percent to 22.5 percent to 15 percent.

From 1942, the exclusion holding period for capital gains was reduced to six months, but the excludable percentage was adjusted to a fixed rate of 50 percent. Taxpayers also had the option to elect an alternative tax rate of 25 percent if their ordinary tax rate exceeded 50 percent (Auten, 1999).

The 1969 Tax Reform Act imposed a minimum capital gains tax rate of 10 percent, and eliminated the alternative tax rate for individuals with capital gains above $50,000. For amounts above $50,000, the applicable tax rates were 27.5 percent in 1969, 29.5 percent in 1970, 32.5 percent in 1971, and 35 percent in 1972 and beyond (Weiss, 1970).

In subsequent years, several changes to the tax law impacted the capital gains tax rate. The 1976 Tax Reform Act increased the minimum capital gains tax rate to 15 percent and the maximum tax rate to 39.875 percent. However, this was later reduced in 1978, when the minimum rate on excluded gains was eliminated and the capital gains exclusion percentage increased to 60 percent (Auten, 1999).

The 1986 Tax Reform Act repealed the capital gains exclusion and raised the maximum tax rate from 20 percent back to 28 percent. A further change occurred with the 1997 Taxpayer Relief Act, which reduced the maximum tax rate to 20 percent (Adams, 2021).

Finally, the Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the capital gains tax rate for long-term capital gains to 15 percent (CRS Report, 2011). As of 2013, the maximum long-term capital gains tax rate is 20 percent, with three tax rates depending on the taxpayer's taxable income.

In addition, it is worth noting that market discount bond gains are treated as ordinary income and subject to ordinary tax rates, with the exception of excess accrued market discount (IRC Section 1276). IRC Section 1278 provides further details on what constitutes a market discount bond.

Capital losses for corporate stocks and bonds occur when investments are sold at a lower price than their purchase price. These losses can offset capital gains, reducing the amount of tax owed. If capital losses exceed capital gains, up to $3,000 in losses can be deducted from ordinary income, with any remaining losses carried forward to future years.

Overall, the tax treatment for corporate stocks and bonds is complex and has evolved significantly over time. It provides incentives for investors to hold their investments for longer, thereby lowering their tax rate.

Investing in corporate stocks and bonds can be advantageous for individuals as they can receive dividends in the form of cash or additional stocks, as well as interest for bonds. Bond interest has been taxed at ordinary rates since the enactment of the Revenue Act of 1913. On the other hand, dividend taxation has gone through significant changes over the years. Initially, dividend income was exempt from taxation, but in 1954, it began to be taxed at ordinary rates with the first $50 exempt per individual. The exclusion amount increased in subsequent years, with the exception of 1986, when it was repealed and dividend income was taxed fully at ordinary rates. In 2003, the Jobs and Growth Tax Reconciliation Act reduced the tax rate for dividends to 15 percent as capital gains and its extension was further granted in later years. In 2013, the American Taxpayer Relief Act increased the top tax rate for dividend income to 20 percent. It is important to note that only qualified dividends are qualified for this tax rate, while unqualified dividend income is taxed at ordinary rates. Investors also need to consider that dividends are subject to double taxation, as they have already been taxed at the corporate tax rate (21 percent in 2021).

Corporations may distribute dividends in the form of stock dividends, which were initially excluded from taxable income. The current tax treatment for stock dividends is based on the Eisner v. Macomber case, which stated that stock dividends were excluded from taxable income, and IRC Section 305 and Regulation 1.305-1 further elaborate on their tax treatment.

Investors can also consider investing in municipal or savings bonds, which are exempt from federal taxes. Municipal bonds are issued by state and local governments, while savings bonds are issued by the U.S. Treasury. Notable cases such as the South Carolina v. Baker case and the C.I.R. v. Trustees of Leland Stanford case have shed light on the tax treatment of certain bonds.

Future trends in taxation include the financial transaction tax, which proposes to tax transactions in the financial markets, as well as the potential elimination of tax-exempt interest, which may result in higher taxes for individuals. The mark-to-market taxation system, where assets are taxed based on their market value, is also being considered as an alternative tax system.