Most dividends are ordinary income, but some are taxed at lower capital gains rates

Whether a dividend counts as ordinary income depends on the type of dividend and how long you held the stock. may have access to dividends — paid by U.S. corporations on stock you held for more than 60 days — are taxed at the lower capital gains rate, which ranges from 0% to 20% depending on your total income. Ordinary dividends — everything else — are taxed at your regular income tax rate, which can be as high as 37%.

The difference matters. A may have access to dividend on $5,000 of stock might cost you $500 in taxes at a 10% rate, while the same dividend taxed as ordinary income could cost $1,850 at a 37% rate. Your brokerage will tell you which type each dividend is on your 1099-DIV form, and you report them separately on your tax return.

Key Takeaways

  • may have access to dividends are taxed at capital gains rates (0%, 15%, or 20%) if you held the stock for more than 60 days around the payment date.
  • Ordinary dividends are taxed at your full income tax rate, the same as wages or salary.
  • Your brokerage reports may have access to and ordinary dividends separately on Form 1099-DIV, and you must report them separately on your tax return.
  • Dividends from real estate investment trusts (REITs), master limited partnerships (MLPs), and most bonds are always ordinary income.
  • If you held stock for 60 days or fewer, even dividends from major corporations count as ordinary income.

What makes a dividend "may have access to" instead of ordinary

A dividend is may have access to only if two conditions are both true: the stock was issued by a U.S. corporation (or a may have access to foreign corporation), and you held the stock for more than 60 days during the 121-day window centered on the ex-dividend date. The ex-dividend date is the cutoff — if you buy the stock on or after that date, you do not receive the dividend at all.

The 60-day holding period is strict. If you bought the stock 50 days before the ex-dividend date and sold it 10 days after, you held it for 60 days total but not for more than 60 days, so the dividend is ordinary income. Days you held the stock while it was on loan (for short selling or margin purposes) do not count toward the 60 days.

This rule exists to prevent investors from collecting dividends without taking on the real risk of ownership. If you buy a stock the day before it pays a dividend and sell it the day after, you have almost no economic exposure to the company, so the tax code treats that dividend as ordinary income.

Which dividends are always ordinary income

Some investments pay dividends that are always taxed as ordinary income, regardless of how long you hold them. Real estate investment trusts (REITs) must distribute at least 90% of their taxable income to shareholders, and those distributions are ordinary income. Master limited partnerships (MLPs) also pay ordinary income distributions. Dividends from bonds, bond funds, and preferred stock issued before 2003 are ordinary income. Dividends from foreign corporations are ordinary income unless the corporation is incorporated in a U.S. possession or meets other narrow tests.

Money market funds and bond funds pay interest, not dividends, and that interest is always ordinary income. If you see a fund labeled as paying dividends but it invests in bonds or money market instruments, those payments are still taxed as ordinary income even though the fund calls them dividends.

How to report dividends on your tax return

Your brokerage sends you a Form 1099-DIV by January 31 each year. Box 1a shows ordinary dividends, and Box 1b shows may have access to dividends. You report both on Schedule B (Interest and Ordinary Dividends) if your ordinary dividends are over $1,500, or you can report them directly on Form 1040 if they are under that threshold. may have access to dividends go on Schedule D (Capital Gains and Losses) or Form 8949 (Sales of Securities), depending on your total capital gains and losses for the year.

If your brokerage made an error and listed a dividend as may have access to when it should be ordinary (or vice versa), you can correct it on your return. Keep records of when you bought and sold each stock so you can verify the holding period if the IRS questions it.

Tax rates for may have access to versus ordinary dividends

may have access to dividends are taxed at the same rates as long-term capital gains: 0%, 15%, or 20%, depending on your taxable income. For 2024, the 0% rate applies if your taxable income is under $47,025 (single) or $94,050 (married filing jointly). The 15% rate applies to income between those thresholds and $518,900 (single) or $583,750 (married). Anything above that is taxed at 20%.

Ordinary dividends are taxed at your marginal income tax rate: 10%, 12%, 22%, 24%, 32%, 35%, or 37%. Because ordinary dividends are stacked on top of your other income, a dividend that pushes you into a higher tax bracket will be taxed at that higher rate. This is why the difference between may have access to and ordinary can be so large — a dividend taxed at the 37% ordinary rate costs nearly twice as much as one taxed at the 20% capital gains rate.

What happens if you do not hold the stock long enough

If you sell a stock before meeting the 60-day holding requirement, the dividend it paid you is ordinary income. This can happen by accident if you buy a stock shortly before its ex-dividend date, collect the dividend, and then sell. You thought you were getting a may have access to dividend, but the timing disqualified it.

Some investors try to avoid this by buying dividend stocks just before the ex-dividend date and selling shortly after. The IRS watches for this pattern, especially with high-dividend stocks or when you have offsetting losses. If the IRS determines you were trading for the dividend rather than investing in the company, it can reclassify the dividend as ordinary income and assess penalties.

Dividends from employer stock plans and restricted stock

If you receive dividends on restricted stock units (RSUs) or stock from an employee stock purchase plan (ESPP), the holding period for may have access to dividend treatment starts from when the stock vests or is purchased, not from when you received the grant or enrolled in the plan. For RSUs, the clock starts on the vesting date. For ESPP, it starts on the purchase date.

This means dividends paid on RSUs or ESPP stock within 60 days of vesting or purchase are ordinary income. If you hold the stock for more than 60 days after vesting or purchase, later dividends are may have access to (assuming the other conditions are met).

Frequently Asked Questions

Can I have both may have access to and ordinary dividends in the same year?

Yes. If you own multiple stocks or hold some stocks for more than 60 days and others for less, you will receive both types. Your brokerage separates them on the 1099-DIV, and you report them on different parts of your tax return. may have access to dividends get the lower tax rate; ordinary dividends are taxed at your full rate.

What if I bought the stock in a taxable account but it pays dividends in a retirement account?

Dividends inside a 401(k), IRA, or other retirement account are not taxed at all in the year they are paid, regardless of whether they would be may have access to or ordinary. The holding period rule does not apply inside retirement accounts. You pay taxes only when you withdraw money from the account.

Do I have to pay estimated taxes on dividends?

If your dividend income is large enough that your total tax bill will be significantly higher than what your employer withholds from your paycheck, you may need to make quarterly estimated tax payments. Use Form 1040-ES to calculate whether you owe them. Most people with modest dividend income do not need to make estimated payments.

If a company cuts its dividend, does that change how I report past dividends?

No. How you report a dividend depends on the facts at the time it was paid — the type of stock, how long you held it, and the ex-dividend date. A later cut or suspension does not change the tax treatment of dividends you already received. Report them based on the 1099-DIV your brokerage sent you.

Are stock splits or spinoffs treated as dividends for tax purposes?

No. Stock splits and most spinoffs are not taxable events and do not generate dividend income. However, some spinoffs include a cash payment, which is taxed as a dividend. Your brokerage will report any taxable portion on your 1099-DIV. Check the documentation from the company to understand what you received.