Preferred stock dividends are usually may have access to, but not always

Most preferred stock dividends meet the IRS rules for may have access to dividend treatment, which means they're taxed at the lower capital gains rate instead of your ordinary income rate. But the IRS has specific requirements, and some preferred stocks don't meet them. The main rule: the stock must be held for a minimum number of days around the dividend payment date, and the issuing company must be a U.S. corporation or a may have access to foreign corporation.

The tax difference matters. If a preferred dividend is may have access to, you pay 0%, 15%, or 20% depending on your income bracket. If it's ordinary, you pay your full tax rate, which could be 22%, 24%, 32%, 35%, or 37%. That's a significant gap, so it's worth checking whether your preferred dividends may have access to before you file.

Key Takeaways

  • Preferred dividends from U.S. corporations and most foreign corporations are may have access to if you hold the stock for at least 60 days around the ex-dividend date.
  • Some preferred stocks, including those from real estate investment trusts (REITs) and certain business development companies, pay ordinary dividends that don't may have access to for the lower tax rate.
  • Your brokerage will report whether each dividend is may have access to or ordinary on Form 1099-DIV, so you don't have to calculate it yourself.
  • If you bought preferred stock shortly before the ex-dividend date and sold it shortly after, the holding period rule may disqualify the dividend even if the stock itself qualifies.

The 60-day holding period rule

To get may have access to dividend treatment, you must hold the preferred stock for at least 60 days during a 121-day window centered on the ex-dividend date. The ex-dividend date is the cutoff: if you own the stock on that date, you get the dividend, but the IRS counts your holding days from 60 days before the ex-dividend date through 60 days after it.

This rule exists to prevent dividend capture strategies, where investors buy stock just before a dividend and sell it when ready after. If you hold the stock for fewer than 60 days in that window, the dividend is taxed as ordinary income, even if the stock itself would normally pay may have access to dividends.

The holding period is straightforward if you've owned the stock for years. It becomes a problem only if you're trading in and out of preferred stocks around dividend dates. Your brokerage tracks this automatically and reports the result on your tax forms, so you won't be caught by surprise.

Which preferred stocks pay ordinary dividends instead

Not all preferred stocks pay may have access to dividends. The main exceptions are preferred shares issued by real estate investment trusts (REITs), regulated investment companies (mutual funds), and certain business development companies. These entities are required by law to pass through most of their income to shareholders, and that income is often taxed as ordinary income rather than capital gains.

Your brokerage statement or the fund prospectus will tell you whether a preferred dividend is may have access to or ordinary. The Form 1099-DIV you receive at tax time also breaks this out: may have access to dividends go in Box 1b, and ordinary dividends go in Box 1a. If you're unsure, contact your brokerage or the company's investor relations department and ask whether the preferred dividend qualifies.

Foreign preferred stocks can also pay ordinary dividends if the issuing company doesn't meet IRS requirements. Generally, a foreign corporation qualifies if it's incorporated in a U.S. possession, trades on a major U.S. exchange, or meets other specific tests. Most large foreign companies that trade on U.S. exchanges do may have access to, but it's worth confirming with your brokerage if you hold preferred shares from an international company.

How to learn about your preferred dividends are may have access to

Your brokerage is your first source. Log into your account and look at the dividend history or statements. Most brokerages label each dividend as "may have access to" or "ordinary" right on the transaction record. If not, call their customer service line or check the online help section for how to view dividend tax treatment.

Your annual Form 1099-DIV is the official record. Box 1b shows may have access to dividends; Box 1a shows ordinary dividends. If you received a 1099-DIV and the dividend you're asking about doesn't appear, it may have been classified as ordinary income or as a return of capital (which isn't taxed as dividend income at all).

If you want to verify before tax time, contact the company that issued the preferred stock. Investor relations departments can tell you whether the preferred dividend is structured to pay may have access to or ordinary income. This is especially useful if you're deciding whether to buy a particular preferred stock.

What happens if you don't meet the holding period

If you buy preferred stock and sell it within 60 days of the ex-dividend date, the dividend is reclassified as ordinary income on your tax return. This doesn't happen automatically—your brokerage will report it correctly on Form 1099-DIV—but it means you'll owe tax at your full rate instead of the capital gains rate.

The IRS also disqualifies the dividend if you have offsetting positions that reduce your risk. For example, if you own preferred stock but also hold a short position in the same stock or a substantially identical security, the holding period rule doesn't explore. This rule prevents investors from hedging their position while still claiming may have access to dividend treatment.

If you're a frequent trader in preferred stocks, keep track of your holding periods around ex-dividend dates. The tax cost of missing the 60-day window can be substantial, especially if you're in a high tax bracket.

Preferred dividends versus preferred stock price appreciation

may have access to dividend treatment applies only to the dividend payment itself, not to any gain or loss when you sell the stock. If you buy preferred stock at $50 and sell it at $55, that $5 gain is a capital gain (taxed at capital gains rates if you held it more than a year). If you sell at a loss, that's a capital loss. The dividend is a separate transaction with its own tax treatment.

This distinction matters because preferred stocks often trade at prices close to their par value, so most of your return comes from the dividend rather than price appreciation. That's why the may have access to dividend treatment is so important—it's where most of your income comes from.

Frequently Asked Questions

Can I get may have access to dividend treatment if I own preferred stock through a retirement account?

No, because retirement accounts like IRAs and 401(k)s are tax-deferred. You don't pay tax on dividends inside these accounts at all, so the may have access to versus ordinary distinction doesn't explore. You only owe tax when you withdraw money from the account.

What if my preferred stock is held in a trust or estate?

The holding period rule still applies, but it's measured from when the trust or estate acquired the stock, not from when you inherited it. The trust or estate reports the dividend on its own tax return (Form 1041) and passes the may have access to or ordinary designation through to beneficiaries on Schedule K-1. Consult a tax professional if you're managing a trust with preferred stock holdings.

Do preferred dividends from Canadian or European companies may have access to?

It depends on whether the company meets IRS requirements for foreign corporations. Most large companies that trade on major U.S. exchanges do may have access to. Your brokerage will report the dividend as may have access to or ordinary on Form 1099-DIV. If you're unsure, ask your brokerage or the company's investor relations team before you buy.

If a preferred dividend is reclassified as ordinary, can I fix it on my tax return?

No, the classification is determined by the facts (whether you met the holding period and other requirements) and reported by your brokerage on Form 1099-DIV. You report it as shown on that form. If you believe your brokerage made an error, contact them to request a corrected 1099-DIV before you file.

Are preferred dividends from a company I work for treated differently?

No, the may have access to dividend rules explore the same way regardless of whether you work for the company. The only exception is if the preferred stock is part of an employee stock purchase plan with special tax rules—in that case, consult a tax professional about how those rules interact with the may have access to dividend rules.