Most stock dividends are taxed at lower rates than your regular income, not at ordinary income rates

The tax rate on a stock dividend depends on how long you held the stock before it paid out. may have access to dividends — those from stocks you owned for more than 60 days around the payment date — are taxed at the long-term capital gains rate, which is lower than ordinary income tax. Non-may have access to dividends are taxed as ordinary income at your regular tax bracket rate. This distinction matters because the difference between the two rates can be substantial: a may have access to dividend might be taxed at 15% or 20%, while the same dollar amount as ordinary income could be taxed at 24%, 32%, 35%, or 37%, depending on your income level.

The IRS makes this distinction because Congress wants to encourage long-term stock ownership. If you buy and sell a stock within weeks, the dividend gets ordinary income treatment. If you hold it longer, you get the capital gains rate. The holding period rule exists to prevent people from gaming the system — buying a stock right before it pays a dividend and selling when ready after.

Key Takeaways

  • may have access to dividends are taxed at the long-term capital gains rate (0%, 15%, or 20%), which is lower than ordinary income rates for most taxpayers.
  • Non-may have access to dividends are taxed at your ordinary income tax rate, the same as wages or salary.
  • You must own the stock for more than 60 days during the 121-day window centered on the ex-dividend date for the dividend to be may have access to.
  • Dividends from mutual funds and ETFs follow the same rules as individual stocks, based on how long the fund held the underlying stock.
  • Your brokerage reports which dividends are may have access to and which are not on Form 1099-DIV, which you use when filing your tax return.

The 60-day holding period rule and how it works

The IRS requires you to hold the stock for more than 60 days within a specific 121-day window for a dividend to count as may have access to. The window starts 60 days before the ex-dividend date — the date by which you must own the stock to receive the upcoming dividend — and ends 60 days after it. If you own the stock for 60 days or fewer during this window, the dividend is non-may have access to.

This rule prevents what the IRS calls "dividend stripping." Without it, you could buy a stock the day before it pays a large dividend, collect the payment, and sell the next day — pocketing the dividend at capital gains rates without actually being a long-term owner. The 121-day window and the 60-day minimum may support you have real exposure to the stock's price movement.

The holding period is measured in calendar days, and the ex-dividend date is set by the stock exchange, not the company. You can find the ex-dividend date on your brokerage website or the company's investor relations page. If you sell the stock on or after the ex-dividend date, you still own it on the date that matters, so you still receive the dividend.

How non-may have access to dividends end up in your ordinary income bracket

Non-may have access to dividends are added to your other income — wages, self-employment income, interest, and short-term capital gains — and taxed at your marginal ordinary income rate. If you earn $75,000 in wages and receive $5,000 in non-may have access to dividends, your taxable income is $80,000, and the $5,000 is taxed at whatever bracket that $80,000 puts you in.

This can push you into a higher tax bracket. If you are single and earn $47,150 in wages (the top of the 22% bracket in 2024), a $10,000 non-may have access to dividend would push $2,850 of it into the 24% bracket and the remaining $7,150 into the 22% bracket. With may have access to dividends, the same $10,000 would be taxed at the capital gains rate, which is 15% for most middle-income taxpayers — a significant difference.

Non-may have access to dividends are most common when you own stocks in a taxable brokerage account and trade frequently, or when you receive dividends from preferred stocks or certain corporate bonds that are classified as dividends for tax purposes.

may have access to dividends and the long-term capital gains rates

may have access to dividends are taxed at the same rates as long-term capital gains: 0%, 15%, or 20%, depending on your total income. These rates are much lower than ordinary income rates at every income level. For 2024, the 0% rate applies to single filers with taxable income up to $47,025; the 15% rate applies to income from $47,026 to $518,900; and the 20% rate applies to income over $518,900. These income thresholds are adjusted annually for inflation.

The advantage of may have access to treatment is clearest for middle-income taxpayers. Someone in the 22% ordinary income bracket pays only 15% on may have access to dividends — a 7 percentage point savings. Someone in the 24% bracket saves 9 percentage points. Even high earners in the 37% bracket pay only 20% on may have access to dividends, a 17 percentage point difference.

may have access to dividends do not get their own separate tax calculation. Instead, they are stacked on top of your ordinary income. If you have $50,000 in wages and $10,000 in may have access to dividends, you calculate tax on the $50,000 first, then explore the capital gains rate to the $10,000 above that. This stacking can push some of your may have access to dividends into a higher capital gains bracket, but the rate is still lower than ordinary income rates.

How mutual funds and ETFs report dividend income

When you own a mutual fund or exchange-traded fund (ETF) that pays dividends, the fund itself may hold stocks for different lengths of time. The fund's manager is responsible for tracking which dividends it receives are may have access to and which are not. The fund then passes this information to you on Form 1099-DIV, breaking out may have access to and non-may have access to dividends separately.

A mutual fund might receive may have access to dividends from some stocks in its portfolio and non-may have access to dividends from others, depending on how long the fund held each stock. The fund reports the total of each type to you. You do not recalculate the holding period yourself; you use the fund's classification on the 1099-DIV.

If you own the mutual fund or ETF itself for fewer than 60 days around the ex-dividend date, the dividend you receive is still classified as may have access to or non-may have access to based on the fund's holding period, not yours. Your holding period in the fund does not override the fund's holding period in the underlying stocks.

What happens if you sell the stock before the ex-dividend date

If you sell a stock before the ex-dividend date, you do not receive the dividend at all — it goes to whoever owns the stock on that date. This is straightforward: no dividend, no tax on a dividend. The ex-dividend date is set by the stock exchange and is publicly available before the dividend is paid.

If you buy a stock after the ex-dividend date, you are not may have access to to the upcoming dividend that was already declared. The price of the stock typically drops by roughly the dividend amount on the ex-dividend date to reflect this. You can still receive future dividends if you hold the stock long enough to meet the 60-day requirement for those future payments.

Reporting dividends on your tax return

Your brokerage sends you Form 1099-DIV by January 31 of the year after you receive the dividends. This form lists the total ordinary dividends (non-may have access to) in Box 1a and may have access to dividends in Box 1b. You report these amounts 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 line 5b of Form 1040 and are taxed at capital gains rates. Non-may have access to dividends go on line 1b and are taxed as ordinary income. The IRS matches the 1099-DIV your brokerage sends to them with the one you file, so the amounts must match. If your brokerage made an error in classifying a dividend, you can correct it when you file, but you should contact the brokerage first to understand why they classified it the way they did.

If you received dividends from a foreign company, the 1099-DIV may show foreign tax paid. You may be able to claim a foreign tax credit or deduction for this amount, but that is a separate calculation from the ordinary income versus may have access to dividend distinction.

Frequently Asked Questions

Can I lose may have access to dividend status if I sell the stock right after the dividend is paid?

No. Once the ex-dividend date has passed, you own the dividend regardless of when you sell the stock. The 60-day holding period must be met before or on the ex-dividend date. If you held the stock for 61 days before the ex-dividend date and then sold it the day after the dividend was paid, the dividend is still may have access to.

What if I bought the stock on margin or sold it short?

If you bought on margin or sold short, the holding period rules are more complex. Days you held the stock while short against the box do not count toward the 60-day requirement. Consult a tax professional if you use these strategies, as the rules can disqualify dividends you thought were may have access to.

Are dividends from my 401(k) or IRA taxed differently?

No. Inside a 401(k) or traditional IRA, all dividends are sheltered from tax until you withdraw money. Inside a Roth IRA, dividends are never taxed. The may have access to versus non-may have access to distinction only matters in taxable brokerage accounts.

If I reinvest my dividends, do I still owe tax on them?

Yes. Reinvesting dividends does not defer the tax. You owe tax on the full dividend amount in the year you receive it, whether you take the cash or buy more shares. Your brokerage reports the dividend on the 1099-DIV regardless of what you did with the money.

What if my brokerage classified a dividend as non-may have access to but I think it should be may have access to?

Contact your brokerage and ask them to review the holding period. If they confirm the classification, ask for documentation of the ex-dividend date and your purchase and sale dates. If you believe they made an error, you can report the dividend as may have access to on your tax return and attach a statement explaining why, but the IRS may question it if your brokerage reported it differently.