Most dividends are taxed as ordinary income, but some may have access to for lower capital gains rates

Whether a dividend counts as ordinary income depends on the type of dividend and how long you held the stock. may have access to dividends — paid by U.S. corporations or may have access to foreign corporations on stock you held for a set period — are taxed at capital gains rates, which are lower than ordinary income rates. Nonqualified dividends are taxed as ordinary income at your full tax bracket rate. The IRS distinguishes between them because Congress wanted to encourage long-term stock ownership.

Your brokerage or mutual fund company reports which dividends are may have access to and which are not on Form 1099-DIV, which you receive by January 31 each year. You do not have to calculate this yourself — the form tells you the dollar amount in each category. When you file your tax return, you report may have access to dividends on Schedule B (if you have investment income) and then on Form 1040, where they are taxed at the 0%, 15%, or 20% rate depending on your total income. Nonqualified dividends go on Schedule B and are taxed at your ordinary income rate, which can range from 10% to 37%.

Key Takeaways

  • may have access to dividends are taxed at capital gains rates (0%, 15%, or 20%), while nonqualified dividends are taxed at your ordinary income rate (10% to 37%).
  • A dividend is may have access to only if you held the stock for more than 60 days during the 121-day window centered on the ex-dividend date.
  • Dividends from U.S. corporations are usually may have access to; dividends from money market funds, bonds, and REITs are usually nonqualified.
  • Your brokerage reports may have access to and nonqualified dividends separately on Form 1099-DIV, so you do not calculate the distinction yourself.
  • The same stock can pay both may have access to and nonqualified dividends in the same year if you did not meet the holding period for some payments.

What makes a dividend may have access to instead of nonqualified

The IRS has three requirements for a dividend to be taxed as a capital gain instead of ordinary income. First, the dividend must come from a U.S. corporation or a foreign corporation that meets specific conditions (usually one that trades on a U.S. exchange or is incorporated in a U.S. possession). Second, the stock must not be a type that is excluded by law — for example, dividends from real estate investment trusts (REITs), master limited partnerships (MLPs), and most mutual funds that invest in bonds do not may have access to. Third, you must have held the stock for a minimum holding period.

The holding period is the most common reason a dividend ends up nonqualified. You must own the stock for more than 60 days during a 121-day window that starts 60 days before the ex-dividend date. The ex-dividend date is the date set by the company: if you own the stock on or before that date, you receive the dividend. If you sell before the ex-dividend date, you do not receive it. The 121-day window gives you time before and after the ex-dividend date to satisfy the holding requirement. If you bought the stock one week before the ex-dividend date and sold it one week after, you held it for 14 days — far short of the 60-day minimum — so the dividend is nonqualified.

Dividends that are always taxed as ordinary income

Certain types of dividends never may have access to for capital gains treatment, no matter how long you held the investment. Dividends from money market funds are always nonqualified because money market funds are not corporations. The same applies to dividends from bond funds, bond ETFs, and other fixed-income investments — they are interest payments, not dividends, and are taxed as ordinary income. Dividends from REITs (real estate investment trusts) are nonqualified by law, even though REITs are corporations and trade like stocks.

Dividends from master limited partnerships (MLPs) are also nonqualified. Many MLPs are energy companies, and their distributions are often treated differently from ordinary dividends for tax purposes. If you receive a distribution from an MLP, it may be partially taxed as ordinary income and partially as a return of capital, depending on the partnership's structure. Your 1099 form will break this down for you.

Most mutual funds that invest in stocks do pay may have access to dividends, but some do not. A mutual fund that focuses on dividend-paying stocks usually passes may have access to dividends through to you, but a fund that invests in bonds, preferred stock, or foreign stocks may not. Check your fund's prospectus or call the fund company if you are unsure.

How the holding period works in practice

The 121-day holding period window is centered on the ex-dividend date. If the ex-dividend date is June 15, the window runs from April 16 (60 days before) to August 14 (60 days after). You must hold the stock for more than 60 days during this window. If you bought on May 1 and sold on July 31, you held it for 92 days, and 92 of those days fall within the window, so you meet the requirement and the dividend is may have access to.

If you bought on June 10 (five days before the ex-dividend date) and sold on August 20, you held it for 71 days total. But only 65 of those days fall within the 121-day window (June 10 to August 14). You still meet the 60-day requirement, so the dividend is may have access to. However, if you bought on June 10 and sold on July 10, you held it for only 30 days within the window, so the dividend is nonqualified.

The rule exists to prevent "dividend capture" — buying a stock just before the ex-dividend date to collect the dividend and then selling when ready after. Without the holding period, investors could collect may have access to dividends without actually owning the stock long enough to bear the risk of price changes.

Dividends reinvested through a dividend reinvestment plan

If you enroll in a dividend reinvestment plan (DRIP), your dividends are automatically used to buy more shares of the same stock instead of being paid to you in cash. The dividend is still taxable in the year it is paid, even though you did not receive the cash. You report it on your tax return the same way — as may have access to or nonqualified depending on how long you held the original shares.

When you later sell the shares purchased through the DRIP, those shares have their own holding period. If you held the original shares long enough to receive a may have access to dividend, and then held the new shares (purchased with that dividend) for more than one year, those new shares may have access to for long-term capital gains treatment when you sell them. The DRIP does not change the tax treatment of the dividend itself, but it does create a separate cost basis and holding period for the newly purchased shares.

Tax rates for may have access to versus nonqualified dividends

may have access to dividends are taxed at the long-term capital gains rate, which is 0%, 15%, or 20% depending on your total taxable income for the year. The IRS sets income thresholds each year. For 2024, the 0% rate applies to single filers with taxable income up to $47,025; the 15% rate applies from $47,026 to $518,900; and the 20% rate applies to income above that. These thresholds are different for married filing jointly, head of household, and other filing statuses.

Nonqualified dividends are taxed at your ordinary income tax rate, which ranges from 10% to 37% depending on your tax bracket. If you are in the 22% tax bracket, a nonqualified dividend is taxed at 22%, while a may have access to dividend in the same year might be taxed at 15%. The difference can be significant on large dividend payments. Some high-income taxpayers also pay the 3.8% Net Investment Income Tax on dividends, which applies to investment income above certain thresholds ($200,000 for single filers, $250,000 for married filing jointly).

Reporting dividends on your tax return

Your brokerage or mutual fund company sends you Form 1099-DIV by January 31 each year. This form lists may have access to dividends in Box 1b and nonqualified dividends in Box 1a. If you received dividends from multiple sources, you may receive multiple 1099-DIV forms. You do not add them together yourself — you report each form's amounts on Schedule B (Investment Income and Loss) if your total dividends exceed $1,500, or directly on Form 1040 if they are $1,500 or less.

may have access to dividends are then transferred from Schedule B to Form 1040, where they are taxed at capital gains rates. Nonqualified dividends stay on your ordinary income line. If you use tax software, it usually fills in these forms automatically once you enter the 1099-DIV information. If you file by hand or work with a tax preparer, make sure the may have access to and nonqualified amounts are entered in the correct boxes.

Frequently Asked Questions

Can a dividend be partially may have access to and partially nonqualified?

Yes. If you held a stock for long enough to receive a may have access to dividend, but then sold it before the holding period ended for a later dividend payment, that later dividend is nonqualified. Your 1099-DIV will show both amounts separately. You might also receive dividends from a fund that holds both may have access to and nonqualifying investments; the fund reports each type separately.

What if I bought stock right before the ex-dividend date and sold it right after?

The dividend is nonqualified because you did not hold the stock for more than 60 days during the 121-day window. This is the most common reason dividends fail to may have access to. The IRS designed the holding period rule to prevent this exact scenario.

Do I owe taxes on reinvested dividends?

Yes. Even though the dividend was reinvested and you did not receive cash, it is still taxable income in the year it was paid. Your brokerage reports it on Form 1099-DIV, and you report it on your tax return as either may have access to or nonqualified based on your holding period.

Are dividends from foreign stocks may have access to?

Only if the foreign corporation meets IRS requirements, which usually means it is incorporated in a U.S. possession or trades on a U.S. exchange. Dividends from most foreign corporations are nonqualified. Check your 1099-DIV or contact your brokerage if you are unsure whether a specific foreign dividend qualifies.

What is the difference between a dividend and a capital gain?

A dividend is a payment a company makes to shareholders from its profits. A capital gain is the profit you make when you sell an investment for more than you paid for it. may have access to dividends are taxed like long-term capital gains, but they are still dividends — the company paid them to you, not a profit you earned by selling.