Most dividends are taxed at ordinary income rates, but some get a lower rate if you hold the stock long enough

Not all dividends are taxed the same way. may have access to dividends — dividends from stocks you have held for a specific period — are taxed at lower capital gains rates. Ordinary dividends are taxed at your regular income tax rate, the same rate applied to wages or salary. The difference can be significant: a may have access to dividend might be taxed at 15 percent while an ordinary dividend from the same company could be taxed at 24, 32, or 37 percent, depending on your income bracket.

The IRS distinguishes between the two based on how long you owned the stock before the dividend was paid. If you do not meet the holding period requirement, the dividend counts as ordinary income. If you do, it gets the preferential capital gains rate. This matters most if you receive dividends regularly or hold a substantial portfolio.

Key Takeaways

  • may have access to dividends are taxed at capital gains rates (0, 15, or 20 percent) if you held the stock for at least 60 days around the dividend payment date.
  • Ordinary dividends are taxed at your regular income tax bracket rate, which can be as high as 37 percent.
  • The holding period requirement is 60 days before and 60 days after the ex-dividend date, not 60 days total.
  • Dividends from mutual funds, ETFs, and real estate investment trusts (REITs) may be taxed as ordinary income even if the underlying stocks would may have access to.
  • Your brokerage will report which dividends are may have access to and which are ordinary on Form 1099-DIV, which you receive by January 31.

The holding period rule that determines your tax rate

To may have access to for the lower capital gains rate, you must own the stock for a minimum number of days. Specifically, you must hold it for at least 60 days during a 121-day window that begins 60 days before the ex-dividend date — the date by which you must own the stock to receive the dividend payment.

This means if a company's ex-dividend date is June 15, the 121-day window runs from April 16 to September 13. You must own the stock for at least 60 of those 121 days. If you buy the stock on June 1 and sell it on July 15, you own it for only 44 days within the window, so the dividend does not may have access to. If you buy on May 20 and sell on August 20, you own it for 92 days within the window, so it does may have access to.

The rule exists to prevent traders from buying stock just before a dividend payment and selling immediately after, collecting the dividend without bearing the real risk of ownership. If you hold the stock for a long time — months or years — you will easily meet the 60-day requirement.

What counts as an ordinary dividend

An ordinary dividend is any dividend payment that does not meet the holding period requirement, or any dividend from a source that the IRS does not treat as a may have access to dividend source. Most dividends from U.S. corporations and many foreign corporations may have access to if you hold long enough, but some do not.

Dividends that are always taxed as ordinary income include payments from money market funds, bond funds, and most mutual funds (even if the fund holds stocks that would otherwise may have access to). Dividends from real estate investment trusts (REITs) are also ordinary income. Dividends from certain foreign corporations may be ordinary income if the country does not have a tax treaty with the United States or if the corporation does not meet IRS requirements. Dividends paid by S corporations and partnerships to their owners are also treated as ordinary income.

Your brokerage will categorize each dividend payment on your year-end tax statement. If a dividend appears in the "ordinary dividends" box on Form 1099-DIV, you report it as ordinary income on your tax return, regardless of how long you held the stock.

How your tax bracket affects what you owe

Ordinary dividends are added to your other income for the year and taxed at your marginal tax rate. If you earn $50,000 in wages and receive $5,000 in ordinary dividends, your taxable income is $55,000. The $5,000 is taxed at whatever bracket that $55,000 puts you in.

may have access to dividends, by contrast, are taxed separately at capital gains rates. For 2024, the capital gains rates are 0 percent (if your income is below $47,025 for single filers), 15 percent (income between $47,025 and $518,900), or 20 percent (income above $518,900). These brackets are lower than ordinary income brackets at every level. A single filer in the 24 percent ordinary income bracket would pay only 15 percent on may have access to dividends.

If you have both ordinary and may have access to dividends, you report them separately on your tax return. The may have access to dividends get the preferential rate; the ordinary dividends are taxed at your regular rate.

Dividends from funds and REITs are usually ordinary income

If you own shares in a mutual fund or exchange-traded fund (ETF), the dividends you receive are often taxed as ordinary income even if the fund holds stocks that would otherwise pay may have access to dividends. This is because the fund itself, not you, held the stock. The IRS applies different rules to fund distributions.

A mutual fund will report on Form 1099-DIV how much of your distribution is may have access to dividend income and how much is ordinary. The may have access to portion is usually smaller than you might expect, because the fund may have held some stocks for less than the required period, or the fund may have received dividends from foreign corporations or other non-may have access to sources.

Real estate investment trusts (REITs) almost always distribute ordinary income. Even if a REIT holds real estate that generates capital gains, the dividends paid to shareholders are taxed as ordinary income. Some REITs also pay capital gains distributions, which are taxed at capital gains rates, but the regular dividend is ordinary income.

How to report dividends on your tax return

Your brokerage sends you Form 1099-DIV by January 31 of the year following the dividend payment. This form lists all dividends you received in the prior year, separated into categories: ordinary dividends, may have access to dividends, capital gain distributions, and others.

You report ordinary dividends on Schedule B (Interest and Ordinary Dividends) if your total is more than $1,500, or directly on Form 1040 if it is $1,500 or less. You report may have access to dividends on Schedule D (Capital Gains and Losses), even if you have no other capital gains or losses. The IRS uses this separation to apply the correct tax rate to each type of income.

If you receive dividends from multiple brokerages, you will receive multiple 1099-DIV forms. Add up all ordinary dividends across all forms and report the total. Do the same for may have access to dividends. The brokerage has already withheld tax if required, and that withholding appears on the form as well.

What happens if you do not meet the holding period

If you buy a stock, collect a dividend, and sell within 60 days of the ex-dividend date, the dividend is taxed as ordinary income. This can happen unintentionally if you buy a stock shortly before a dividend payment and sell soon after for other reasons.

Some investors use a strategy called "dividend capture" to buy stocks before a dividend and sell after, hoping the stock price stays stable. The IRS discourages this by denying the may have access to dividend rate if the holding period is not met. If you engage in this strategy frequently, the IRS may also challenge whether you are a trader (subject to different rules) rather than an investor.

If you realize after the fact that a dividend did not may have access to, you cannot change how it was reported on Form 1099-DIV. You report it as ordinary income on your tax return. If you believe the brokerage made an error in categorizing the dividend, contact them to request a corrected form.

Frequently Asked Questions

Do I have to hold a stock for a full year to get the may have access to dividend rate?

No. You must hold the stock for at least 60 days during a 121-day window centered on the ex-dividend date. For most stocks held longer than a few months, this requirement is easily met. The rule is designed to prevent very short-term trading around dividend dates, not to require long-term ownership.

What if I own the stock through a 401(k) or IRA?

Dividends inside a 401(k) or traditional IRA are not taxed when received. They are taxed when you withdraw money from the account. Dividends in a Roth IRA are never taxed. The may have access to versus ordinary distinction does not apply inside these accounts because the account itself handles the tax treatment.

Can I deduct losses on dividends I received?

No. A dividend is income; a loss on the stock itself is separate. If you buy a stock at $100, receive a $2 dividend, and sell at $95, you report the $2 as dividend income and a $5 capital loss. You cannot offset one against the other on the same line of your return.

Why is my mutual fund dividend taxed as ordinary income if the fund holds stocks?

The fund itself must meet the holding period requirement for each stock it holds. If the fund bought a stock two weeks before a dividend payment, that dividend is ordinary income to the fund, and the fund passes that ordinary income to you. You do not get the may have access to rate just because you held the fund long enough.

Do I owe tax on dividends I reinvest?

Yes. Whether you take the dividend as cash or reinvest it in more shares, you owe tax on the full amount in the year it is paid. Reinvestment does not defer or eliminate the tax. Your brokerage reports the dividend on Form 1099-DIV regardless of whether you received it in cash.