The core difference: tax rate and holding period
Ordinary dividends are taxed as regular income at your marginal tax rate — the same rate you pay on wages or salary. may have access to dividends are taxed at lower capital gains rates, which top out at 20 percent instead of 37 percent. The difference in what you owe can be substantial.
To receive the lower rate on may have access to dividends, you must hold the stock for a minimum period: at least 60 days during the 121-day window that starts 60 days before the ex-dividend date. Most dividends from U.S. corporations and certain foreign corporations meet the definition if you hold long enough. Dividends that fail the holding period, or come from sources like money market funds or bonds, are taxed as ordinary income instead.
The IRS publishes a list each year of stocks whose dividends do not may have access to, usually because the company is foreign-based or the dividend is actually a return of capital. Your brokerage statement will typically label each dividend as ordinary or may have access to, so you do not have to track the holding period yourself — but the burden is on you to hold the shares long enough.
Key Takeaways
- Ordinary dividends are taxed at your full income tax rate (up to 37 percent), while may have access to dividends are taxed at capital gains rates (up to 20 percent).
- To may have access to for the lower rate, you must own the stock for at least 60 days within the 121-day period centered on the ex-dividend date.
- Dividends from most U.S. corporations may have access to if you meet the holding requirement; dividends from bonds, money market funds, and certain foreign companies are always ordinary income.
- Your brokerage statement shows which dividends are may have access to and which are ordinary, so you know how to report them on your tax return.
How the holding period works in practice
The 121-day window is not the same as owning the stock for 121 days. Instead, it starts 60 days before the ex-dividend date and ends 60 days after it. You must hold the stock for at least 60 of those 121 days without selling.
If you buy a stock on the ex-dividend date itself, you have already missed the window — the 60-day period before the ex-date has passed. If you sell the stock 30 days after receiving the dividend, you have not held it long enough, even if you owned it before the ex-date. The rule is designed to prevent traders from buying a stock just before the dividend and selling when ready after.
Days when you do not own the stock at all do not count toward the 60 days. If you sell the stock and buy it back later, the holding periods do not add together. Your brokerage will track this automatically and report may have access to versus ordinary dividends on your 1099-DIV form, which you receive by January 31 of the following year.
Tax brackets and what the difference means in dollars
The tax rate on may have access to dividends depends on your income bracket. If your income falls in the 10 or 12 percent bracket, may have access to dividends are taxed at 0 percent. In the 22, 24, 32, or 35 percent brackets, may have access to dividends are taxed at 15 percent. In the 37 percent bracket, they are taxed at 20 percent.
Ordinary dividends, by contrast, are taxed at whatever your marginal rate is — the rate on your last dollar of income. A person in the 24 percent bracket pays 24 percent on ordinary dividends but only 15 percent on may have access to ones. Over time, this difference compounds, especially for investors who receive large dividend payments.
The brackets themselves change each year for inflation. The IRS publishes updated brackets in October for the following tax year. If you are near a bracket boundary, receiving a large ordinary dividend instead of a may have access to one could push you into a higher bracket and increase your tax on all your income, not just the dividend.
Which dividends are never may have access to
Dividends from bonds and bond funds are always ordinary income, even if you hold them for years. Interest paid by a bond is not a dividend, and the tax code treats it differently. The same applies to dividends from money market funds and savings accounts — these are interest payments, not dividends, and are taxed as ordinary income.
Dividends from real estate investment trusts (REITs) are ordinary income unless the REIT itself received the income from capital gains. Most REIT dividends are ordinary. Dividends from master limited partnerships (MLPs) are also ordinary income in most cases.
Dividends from foreign corporations may or may not may have access to, depending on whether the country has a tax treaty with the United States and whether the corporation is traded on a U.S. exchange. The IRS publishes a list of foreign corporations whose dividends do may have access to. If a foreign dividend is not on that list, it is taxed as ordinary income.
Reporting may have access to and ordinary dividends on your tax return
Your brokerage sends you a Form 1099-DIV by January 31 showing the total ordinary dividends in Box 1a and may have access to dividends in Box 1b. You report these on Schedule B (if your dividends exceed $1,500) or directly on your Form 1040. The IRS uses the amounts your brokerage reports, so if there is an error, contact your brokerage to file a corrected 1099-DIV.
If you use tax software, it will usually import the 1099-DIV data directly from your brokerage. The software then places may have access to dividends on the correct line of your return so they are taxed at capital gains rates. If you prepare your return by hand, you must make sure may have access to dividends go on the line for capital gains income, not the line for ordinary dividends.
If your brokerage incorrectly labels a dividend as ordinary when it should be may have access to (or vice versa), you can correct it yourself on your return. Keep records of the ex-dividend date, your purchase date, and your sale date to prove the holding period if the IRS questions it later.
What happens if you sell before the holding period ends
If you sell the stock before you have held it for 60 days in the 121-day window, the dividend is still ordinary income — selling does not change how it is taxed. However, you may also have a capital gain or loss on the sale itself, which is taxed separately at capital gains rates (long-term if you held the stock over a year, short-term if under a year).
Some investors buy a stock specifically for its dividend, intending to hold it long-term, but then sell it within weeks because the stock price drops. In that case, they pay ordinary income tax on the dividend and short-term capital gains tax on the loss. The two are taxed differently and reported on different lines of your return.
Frequently Asked Questions
Do I have to hold the stock for a full year to get may have access to dividend treatment?
No. You must hold the stock for at least 60 days during the 121-day window centered on the ex-dividend date. This is much shorter than the one-year holding period for long-term capital gains. You can own the stock for only a few months and still receive may have access to dividend treatment if you hold through the required window.
If I own a stock in a retirement account, are the dividends still may have access to or ordinary?
Dividends in a traditional IRA, Roth IRA, or 401(k) are not taxed at all in the year you receive them — the account is tax-deferred. When you withdraw money from the account later, it is taxed as ordinary income (in a traditional account) or not taxed (in a Roth). The may have access to versus ordinary distinction does not explore inside a retirement account.
What if my brokerage statement shows a dividend as ordinary but I held the stock long enough?
Contact your brokerage and ask them to review the holding period. If they made an error, they will issue a corrected 1099-DIV. If the dividend truly does not may have access to (for example, it is from a foreign company not on the IRS list), the brokerage is correct and you report it as ordinary income.
Can I buy a stock right before the ex-dividend date and still get may have access to dividends?
No. The 60-day holding period must include the 60 days before the ex-dividend date. If you buy the stock on or after the ex-date, you have already missed that window and cannot meet the requirement, even if you hold the stock for months afterward.