Most dividends are taxed at capital gains rates, not ordinary income rates — but some are not

Dividends fall into two tax categories: may have access to dividends, which use the lower capital gains tax rates, and nonqualified dividends, which are taxed as ordinary income at your full marginal rate. The difference can be substantial. If you are in the 24% ordinary income bracket, a may have access to dividend is taxed at 15% (or 20% if your income is very high). A nonqualified dividend in the same situation is taxed at 24%. The IRS does not decide which category your dividend falls into — the company paying it does, based on how long you held the stock and what type of company paid it.

You receive a Form 1099-DIV from your broker or the company itself, and it separates may have access to from nonqualified dividends in boxes 1a and 1b. Your tax software or preparer uses those boxes to calculate your tax. The key is knowing which dividends will land in which box, because that affects whether holding a stock longer makes sense, and whether certain dividend-paying investments belong in a taxable account or a retirement account.

Key Takeaways

  • Nonqualified dividends are taxed as ordinary income at your full marginal rate, while may have access to dividends use the lower capital gains rates (0%, 15%, or 20% depending on your income).
  • To may have access to for the lower rate, you must hold the stock for more than 60 days during the 121-day window centered on the ex-dividend date.
  • Dividends from real estate investment trusts (REITs), master limited partnerships (MLPs), and most bond funds are always nonqualified and taxed as ordinary income.
  • If you sell a stock within 30 days before or after buying it, any loss is disallowed and the dividend is treated as nonqualified, even if you otherwise met the holding period.
  • Placing high-dividend or REIT holdings in tax-deferred accounts like IRAs or 401(k)s can eliminate the tax difference and simplify your tax return.

The 60-day holding period rule for may have access to dividends

The IRS requires you to 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 by which you must own the stock to receive the dividend; if you buy on or after that date, you do not receive it. The 121-day window runs from 60 days before the ex-dividend date through 60 days after it.

In practice, this means if you buy a stock one day before the ex-dividend date and sell it one day after, you do not meet the 60-day test and the dividend is nonqualified. If you buy it 65 days before the ex-dividend date and hold it through the ex-dividend date, you do meet the test. The rule exists to prevent dividend-capture strategies where investors buy stock purely to collect the dividend and sell when ready after.

The holding period is interrupted if you sell the stock or enter into a contract to sell it. Short sales, puts, and calls can also interrupt it. If you are unsure whether a transaction affects your holding period, your broker's tax reporting tool or a tax professional can clarify before you file.

Dividends that are always taxed as ordinary income

Certain investments pay dividends that never may have access to for the lower capital gains rate, no matter how long you hold them. Real estate investment trusts (REITs) are the most common. REITs are required to distribute at least 90% of their taxable income to shareholders, and those distributions are taxed as ordinary income. A REIT dividend might yield 3% to 5% annually, all of it ordinary income.

Master limited partnerships (MLPs) and other partnership structures also pay distributions taxed as ordinary income. Bond funds and bond ETFs pay interest income, which is always ordinary income. Preferred stock dividends are usually may have access to if you meet the holding period, but some preferred issues pay distributions that are ordinary income by design — check the prospectus.

Dividends from foreign corporations are also nonqualified unless the foreign country has a tax treaty with the United States and the stock meets additional requirements. If you own an international fund or individual foreign stocks, assume the dividends are nonqualified unless your fund documentation or broker statement says otherwise.

The wash-sale rule and its effect on dividend treatment

If you sell a stock at a loss and buy the same stock (or a substantially identical one) within 30 days before or after the sale, the wash-sale rule disallows the loss. But there is a second consequence: any dividend you receive during the wash-sale period is treated as nonqualified, even if you otherwise held the stock long enough.

This matters most if you are tax-loss harvesting — selling a losing position to offset gains elsewhere. If you sell a stock at a loss in November and buy it back in December, and the stock pays a dividend in January, that dividend will be nonqualified. If you want to harvest the loss and keep the dividend may have access to, you need to wait 31 days after repurchasing before the ex-dividend date, or use a different but substantially identical security (such as a similar ETF) in the meantime.

Deciding whether to hold dividend stocks in taxable or tax-deferred accounts

Because nonqualified dividends are taxed at your full ordinary income rate, they are less tax-efficient in a taxable account than may have access to dividends or capital gains. This makes REITs, MLPs, and bond funds better candidates for a traditional IRA, Roth IRA, or 401(k), where the dividend is not taxed annually. In those accounts, the tax difference disappears — you pay tax on withdrawals (in a traditional account) or not at all (in a Roth), regardless of how the income was classified.

If you have limited room in tax-deferred accounts, prioritize high-yield nonqualified payers. A REIT yielding 4% in a taxable account costs you roughly 1% per year in extra taxes (if you are in the 24% bracket and would otherwise pay 15% on may have access to dividends). That same REIT in an IRA costs you nothing annually. may have access to dividend stocks and index funds, which generate mostly capital gains, are more efficient in taxable accounts and can stay there.

This strategy is called asset location — placing each holding in the account type that minimizes its tax drag. It requires you to know which dividends are may have access to and which are not, which is why the Form 1099-DIV matters.

How to report nonqualified dividends on your tax return

Your broker sends you a Form 1099-DIV showing may have access to dividends in box 1a and nonqualified dividends in box 1b. You report both on Schedule B (Interest and Ordinary Dividends) if your total dividends and interest exceed $1,500, or directly on Form 1040 if they do not. may have access to dividends go on Schedule D (Capital Gains and Losses) or Form 8949 (Sales of Capital Assets), where they are taxed at the preferential rates.

If you use tax software, it reads the 1099-DIV automatically and places each amount in the correct location. If you file by hand or work with a preparer, make sure they understand which box is which. A common error is treating all dividends as may have access to or all as nonqualified. The 1099-DIV is your source of truth.

If you received dividends but no 1099-DIV, contact your broker or the company. If the amount is small (usually under $10), the company may not have issued one, but you still owe tax on it. Report it on Schedule B as nonqualified income unless you have documentation that it was may have access to.

When to hold a dividend stock longer for tax reasons

If you are considering selling a stock that pays may have access to dividends, and you are close to meeting the 60-day holding period, it may be worth waiting. The tax savings on one or two upcoming dividends can exceed the cost of holding a position you otherwise want to exit. Conversely, if you own a stock that pays nonqualified dividends and you are thinking of selling at a small gain, the gain might be offset by the ordinary income tax on the next dividend — in that case, selling sooner may make sense.

This calculation depends on your marginal tax rate, the dividend yield, and how long you would have to hold. A financial planner or tax professional can run the numbers for your specific situation. The point is that dividend tax treatment is one input into the hold-or-sell decision, not the only one.

Frequently Asked Questions

Can I lose may have access to dividend status if I sell the stock after the ex-dividend date?

No. Once the ex-dividend date passes, you have received the dividend and the holding period requirement is met (assuming you held for 60 days in the 121-day window). Selling the next day does not change the tax treatment of that dividend. The 60-day rule applies to the period around the ex-dividend date, not to the period after you sell.

What if I own a mutual fund that holds dividend-paying stocks?

The mutual fund itself reports may have access to and nonqualified dividends on your 1099-DIV based on how long the fund held each underlying stock. You do not need to track the holding periods of individual stocks in the fund — the fund does that for you. The fund's total may have access to and nonqualified dividends appear on your 1099-DIV, and you report them accordingly.

Are stock dividends (when a company issues new shares instead of cash) taxed differently?

Stock dividends are generally not taxable when received, but they reduce your cost basis in the stock. When you eventually sell, your gain or loss is calculated using the adjusted basis. Some stock dividends are taxable if they are paid in lieu of a cash dividend or if you have the option to take cash instead — check the company's announcement or your 1099-DIV.

If I inherit a stock, do I get a fresh holding period for dividends?

No. Inherited stock does not reset the holding period for dividend qualification purposes. However, inherited stock receives a "step-up" in basis to its value on the date of death, which affects your capital gains tax, not your dividend tax. The dividend holding period is based on when the original owner bought the stock, not when you inherited it.

Do I owe tax on reinvested dividends?

Yes. Even if you reinvest dividends automatically through a dividend reinvestment plan (DRIP), you owe tax on them in the year they are paid. The 1099-DIV reports the cash value of reinvested dividends, and you report that amount on your tax return. Reinvestment does not defer the tax.