What counts as dividend and capital gains income
Dividends are payments a company sends to people who own its stock. When you own shares in a company or a mutual fund that holds shares, the company may distribute some of its profits to you. That payout is a dividend.
Capital gains happen when you sell an investment for more than you paid for it. If you bought a stock for $100 and sold it for $150, your capital gain is $50. The same applies to real estate, bonds, or any asset you own and later sell at a higher price.
Both types of income are reported to the IRS and taxed, but the tax rate depends on how long you held the investment and how much total income you earned that year. For lower-income households, the tax rate on these gains can be zero, 15%, or 20%, depending on your situation.
Key Takeaways
- Long-term capital gains and may have access to dividends may be taxed at 0%, 15%, or 20% depending on your total income for the year, not the investment itself.
- If you sold an investment within one year of buying it, it is taxed as ordinary income at your regular tax rate, which is usually higher than the long-term rate.
- Lower-income filers may pay zero tax on long-term gains and may have access to dividends if their total income stays below certain thresholds, which vary by filing status.
- You report dividends and capital gains on Schedule D and other forms when you file your tax return; the IRS receives the same information from your broker.
- Losses on investments can reduce your taxable gains, and unused losses can carry forward to reduce gains in future years.
How long you held the investment matters
The IRS treats investments you sell quickly very differently from those you hold for years. If you owned an investment for one year or less before selling it, any gain is a short-term capital gain. Short-term gains are taxed at your ordinary income tax rate — the same rate applied to wages or salary.
If you held the investment for more than one year before selling, the gain is a long-term capital gain. Long-term gains receive preferential tax treatment and are taxed at lower rates than ordinary income. The same rule applies to dividends: may have access to dividends (those from U.S. companies or certain foreign companies, held for a set period) get the lower long-term rate, while non-may have access to dividends are taxed as ordinary income.
For a lower-income household, this distinction can mean the difference between paying tax and paying nothing. A person with $30,000 in total income might owe zero tax on $5,000 in long-term gains but would owe tax on $5,000 in short-term gains.
The zero percent tax bracket for long-term gains
The federal government allows lower-income filers to realize long-term capital gains and may have access to dividends with no federal income tax. This is not a deduction or a credit — it is an actual zero percent tax rate on those gains, up to a certain income threshold.
For 2024, the income thresholds are approximately $47,025 for single filers and $94,050 for married couples filing jointly. These numbers change each year. If your total income (wages, dividends, capital gains, and other sources combined) stays below your threshold, your long-term gains and may have access to dividends are not taxed at the federal level.
The threshold is not a cliff. If you earn $47,026 as a single filer, you do not lose the entire benefit. Instead, gains above the threshold are taxed at 15% until you reach a higher income level, where the rate jumps to 20%. Your broker and tax software will calculate this for you when you file.
Income thresholds and tax rates by filing status
The income levels where each tax rate applies vary based on how you file. These thresholds are adjusted annually for inflation, so the numbers change from year to year. The table below shows approximate 2024 thresholds; check the IRS website or your tax software for the current year.
| Filing Status | 0% Rate Ends At | 15% Rate Ends At | 20% Rate Applies Above |
|---|---|---|---|
| Single | ~$47,025 | ~$518,900 | ~$518,900 |
| Married Filing Jointly | ~$94,050 | ~$583,750 | ~$583,750 |
| Head of Household | ~$62,975 | ~$551,350 | ~$551,350 |
| Married Filing Separately | ~$47,025 | ~$291,875 | ~$291,875 |
Your total income includes wages, self-employment income, rental income, Social Security (partially, in some cases), and all investment income combined. If you are close to a threshold, even a small amount of additional income can push you into a higher tax bracket for your gains.
How to report dividends and capital gains on your tax return
When you sell an investment or receive a dividend, your broker sends you a form and reports the same information to the IRS. For stock sales, you receive Form 1099-B. For dividends, you receive Form 1099-DIV. These forms arrive by January 31 of the year after the transaction.
You report this information on Schedule D (Capital Gains and Losses) when you file your federal tax return. If you use tax software, it will import the data from your broker and walk you through the questions. If you file by hand or with a tax preparer, you will need to provide these forms and any records of your original purchase price and date.
The IRS already has copies of these forms, so misreporting or omitting them will trigger a notice. If you lost money on an investment, report that too — capital losses reduce your taxable gains and can reduce your ordinary income by up to $3,000 per year. Unused losses carry forward indefinitely.
State and local taxes on investment income
Federal tax is only part of the picture. Many states tax capital gains and dividends, and some tax them differently than the federal government does. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax capital gains or dividends at all. Others tax them at the same rate as ordinary income.
Some states offer their own preferential rates for long-term gains. New York, for example, taxes long-term gains at a lower rate than short-term gains. Your state tax return will have its own schedule for reporting these items, and your tax software will calculate state tax based on your state of residence.
If you live in a state with no capital gains tax, you still file a federal return and pay federal tax. If you live in a state with high income tax, the federal zero percent bracket becomes even more valuable because it saves you federal tax while you may still owe state tax.
Using losses to reduce your tax bill
If you sold an investment at a loss, that loss reduces your taxable gains dollar-for-dollar. If you had $8,000 in long-term gains and $3,000 in long-term losses, your net long-term gain is $5,000, and that is what gets taxed.
If your losses exceed your gains in a year, you can deduct up to $3,000 of the excess loss against your ordinary income (wages, salary, and other non-investment income). If you have more than $3,000 in unused losses, they carry forward to the next year and the year after that, with no time limit. You can use them to offset future gains or ordinary income.
This strategy, called tax-loss harvesting, is sometimes used by investors to deliberately sell losing positions to offset gains. However, the IRS has a rule called the wash-sale rule: if you sell a security at a loss and buy the same or a substantially identical security within 30 days before or after the sale, the loss is disallowed. Plan carefully if you want to use losses to reduce your tax bill.
Frequently Asked Questions
Do I have to pay tax on dividends if I did not sell the stock?
Yes. Dividends are taxable income in the year you receive them, whether you sell the stock or not. You report them even if you reinvest them into more shares. The tax rate depends on whether they are may have access to dividends (usually 0%, 15%, or 20%) or non-may have access to dividends (your ordinary income tax rate).
What if I inherited stock and then sold it?
Inherited stock receives a "step-up in basis," meaning your cost basis is the stock's value on the date of death, not what the original owner paid. If you sell it shortly after inheriting it, you may have little or no capital gain, even if the original owner bought it decades earlier at a much lower price. This is a major tax benefit of inheritance.
Can I avoid taxes by not selling my investments?
You avoid capital gains tax by not selling, but you still owe tax on dividends each year you receive them. If you hold an investment until death, your heirs receive the step-up in basis and can sell with little or no tax. However, you cannot avoid dividend tax without selling the investment.
Do I report investment income if I did not receive a 1099 form?
Yes. You are required to report all investment income, whether or not you receive a form. If your broker did not send a form or sent an incorrect one, you still report the income based on your own records. The IRS cross-checks 1099 forms with tax returns, so unreported income is likely to be caught.
How do I know if a dividend is may have access to or non-may have access to?
Your broker will tell you on the 1099-DIV form or in your account statements. Generally, dividends from U.S. companies and most foreign companies are may have access to if you held the stock for at least 60 days around the dividend payment date. Dividends from real estate investment trusts (REITs) and some other investments are usually non-may have access to.