Most stock dividends are taxed at ordinary income rates, but some may have access to for lower rates

When a company pays you a dividend from stock you own, the IRS taxes it as ordinary income unless the dividend meets specific conditions. may have access to dividends — dividends from stocks you have held for a minimum period and from companies that meet IRS rules — are taxed at lower capital gains rates instead. Ordinary dividends, which do not meet those conditions, are taxed at your regular income tax bracket, the same rate as wages or salary.

The difference matters. If you are in the 24% tax bracket, an ordinary dividend of $1,000 costs you $240 in federal tax. The same $1,000 as a may have access to dividend might cost you $150 (at the 15% long-term capital gains rate) or $0 (at the 0% rate if your income is low enough). Your brokerage will report which dividends are may have access to and which are ordinary on your tax forms.

Key Takeaways

  • Ordinary dividends are taxed at your full income tax rate; may have access to dividends are taxed at lower capital gains rates (0%, 15%, or 20% depending on your income).
  • To may have access to for the lower rate, you must have held the stock for at least 60 days during the 121-day window centered on the dividend payment date.
  • Your brokerage reports dividend type on Form 1099-DIV, which you receive by January 31 and use when filing your tax return.
  • Dividends from certain investments — money market funds, bonds, and real estate investment trusts — are always taxed as ordinary income, never as may have access to dividends.

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

The IRS created the may have access to dividend category in 2003 to encourage long-term stock ownership. A dividend qualifies for the lower capital gains rate only if two conditions are both true: you held the stock long enough, and the company that paid it meets IRS requirements.

The holding period is the stricter rule for most investors. You must own the stock for at least 60 days during a 121-day window that starts 60 days before the ex-dividend date (the date the company sets as the cutoff for who receives the dividend). If you buy a stock three days before the ex-dividend date and sell it two weeks later, that dividend is ordinary income, not may have access to, even though you received it. If you hold the stock through the entire period, the dividend qualifies.

The company requirement is simpler: the stock must be issued by a U.S. corporation or a may have access to foreign corporation (most large foreign companies that trade on U.S. exchanges may have access to). Dividends from real estate investment trusts (REITs), master limited partnerships (MLPs), and most mutual funds that invest in bonds are always ordinary income, regardless of how long you hold them.

How your tax rate changes based on dividend type

Ordinary dividends are taxed at your marginal tax rate — the same rate you pay on your last dollar of wages. If you are in the 22% bracket, ordinary dividends are taxed at 22%. If you are in the 37% bracket, they are taxed at 37%.

may have access to dividends are taxed at the long-term capital gains rate, which is lower. The rate depends on your total taxable income for the year, not on the dividend amount alone. For 2024, the rates are 0%, 15%, or 20%. Most middle-income taxpayers fall into the 15% bracket. Lower-income taxpayers may pay 0%. High-income taxpayers pay 20%, plus a 3.8% net investment income tax if their modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).

Your brokerage will not calculate your tax or tell you which rate applies to you. It reports the dividend type on your tax form. You or a tax preparer then determine your capital gains rate based on your total income for the year.

What your brokerage reports and when

By January 31 each year, your brokerage sends you Form 1099-DIV, which lists all dividends you received during the previous year. The form separates ordinary dividends (Box 1a) from may have access to dividends (Box 1b). If you received dividends from multiple brokerages, you will receive multiple 1099-DIVs.

The brokerage uses its records of when you bought and sold the stock to determine which dividends may have access to. If you held the stock for fewer than 60 days during the required window, the brokerage marks that dividend as ordinary. If you held it long enough, it marks it as may have access to. The brokerage does not always get this right — errors happen, especially with stocks you bought and sold quickly or with dividend reinvestment plans — so check your 1099-DIV against your own records.

You report these dividends on Schedule B (if you have more than $1,500 in dividends) or directly on Form 1040. may have access to dividends go on a separate line from ordinary dividends so the IRS knows to apply the lower rate.

Dividends that are never may have access to, no matter how long you hold

Some investments pay dividends that the IRS treats as ordinary income by law, regardless of your holding period. Real estate investment trusts (REITs) always pay ordinary dividends. Master limited partnerships (MLPs) always pay ordinary dividends. Dividends from bond funds, money market funds, and preferred stock issued before 2003 are ordinary income.

Mutual funds and exchange-traded funds (ETFs) that invest in stocks can pay both may have access to and ordinary dividends. The fund itself does not pay the dividend; it receives dividends from the stocks it owns and passes them through to you. The fund reports which portion is may have access to and which is ordinary based on the underlying stocks. A bond fund, however, pays only ordinary dividends because bonds do not pay may have access to dividends.

If you are unsure whether a particular investment pays may have access to or ordinary dividends, check the fund's prospectus or call the fund company. Your brokerage 1099-DIV will show the breakdown once you receive it.

How dividend reinvestment affects your holding period

If you have set up dividend reinvestment (DRIP) through your brokerage, dividends are automatically used to buy more shares instead of being paid to you in cash. This does not change the tax treatment — you still owe tax on the dividend in the year you receive it, even though you did not get the cash. But it does affect your holding period for future dividends.

When you reinvest a dividend, you buy new shares at the dividend payment date. Those new shares have their own holding period clock. If you reinvest a dividend on June 15 and that stock pays another dividend on September 1, you must hold those reinvested shares for 60 days around the September ex-dividend date to may have access to that second dividend. Your original shares, bought years ago, still may have access to. The reinvested shares do not, unless you hold them long enough.

This matters most if you buy a stock shortly before the ex-dividend date, collect the dividend, and then sell. Even if you reinvest the dividend, the original dividend is ordinary income because you did not hold the stock long enough. The reinvested shares are separate and have their own holding period.

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 — the new owner does. This is the simplest case: no dividend, no tax. But if you sell after the ex-dividend date but before the 60-day holding period is complete, the dividend is ordinary income.

Some investors try to time stock sales to avoid the holding period rule. They buy a stock just before the ex-dividend date, collect the dividend, and sell shortly after. The IRS calls this a "dividend capture" strategy. If you do this repeatedly with the same stock or similar stocks, the IRS may challenge the transaction and disallow the may have access to dividend treatment. The rule is meant to discourage short-term trading around dividend dates, not to prevent you from selling a stock you own.

Frequently Asked Questions

Do I owe tax on dividends in the year I receive them or the year I reinvest them?

You owe tax in the year you receive the dividend, even if you reinvest it and never see the cash. The dividend is income the moment the company pays it. Your brokerage reports it on your 1099-DIV for that tax year, and you report it on your tax return for that year.

Can I carry forward a loss on a stock to offset dividend income?

Yes, but only if you sell the stock at a loss. Capital losses offset capital gains first, then up to $3,000 of ordinary income per year. Excess losses carry forward to future years. Dividends alone do not create a loss; only selling the stock at a price below what you paid creates a loss.

What if I inherited stock — does my holding period start from when I inherited it or when the original owner bought it?

Your holding period starts from the date you inherited the stock, not from when the original owner bought it. However, inherited stock receives a "step-up" in basis, meaning the IRS treats the value on the date of death as your purchase price. Any dividends you receive after inheriting the stock are treated as may have access to dividends if you hold the stock for the required 60 days.

Are stock dividends from my employer's retirement plan taxed differently?

Dividends inside a 401(k), IRA, or other retirement account are not taxed in the year you receive them. They grow tax-deferred inside the account. When you withdraw money from the account in retirement, the entire withdrawal is taxed as ordinary income (for traditional accounts) or tax-free (for Roth accounts). The may have access to dividend rate does not apply inside retirement accounts.

If I receive a dividend but the brokerage reports it wrong on my 1099-DIV, do I have to pay the higher tax?

No. You can report the dividend correctly on your tax return even if the brokerage reported it wrong. Keep your own records of when you bought and sold the stock to prove the holding period. If the IRS questions it, you can show your documentation. Attach a note to your return explaining the correction if the amount is large.