Preferred stock dividends are usually taxed as ordinary income, not may have access to dividends, even though they come from stocks

The tax treatment of preferred stock dividends depends on how long you held the stock and whether the dividend meets the IRS definition of "may have access to." Most preferred stock dividends do not meet that definition. They are taxed at your ordinary income tax rate instead of the lower may have access to dividend rate. The key difference comes down to the type of preferred stock and the issuer, not just the fact that it is a stock.

A may have access to dividend must come from a U.S. corporation or a may have access to foreign corporation, and you must have held the stock for a minimum holding period. For most common stock, that period is 60 days before or after the ex-dividend date. For preferred stock, the rules are stricter and the holding period is longer in some cases. Many preferred stocks issued by banks, utilities, and investment firms do not meet these requirements, which means their dividends are taxed as ordinary income.

Key Takeaways

  • Preferred stock dividends are taxed as ordinary income unless they meet specific IRS requirements for holding period and issuer type.
  • You must hold preferred stock for at least 90 days during a 180-day window around the ex-dividend date for the dividend to be may have access to.
  • Dividends from certain preferred stocks—including those issued by real estate investment trusts (REITs), master limited partnerships (MLPs), and some foreign corporations—are never may have access to.
  • Your brokerage statement or the issuer's website will usually label dividends as "may have access to" or "ordinary," but you should verify this against your holding period.

The holding period requirement for preferred stock

The IRS requires you to hold preferred stock for at least 90 days during a 180-day window centered on the ex-dividend date. This is longer than the 60-day requirement for common stock. The 180-day window starts 90 days before the ex-dividend date and ends 90 days after it. You must own the stock for at least 90 of those 180 days to treat the dividend as may have access to.

Days when you do not have full ownership do not count toward the holding period. If you bought the stock on margin, pledged it as collateral, or held it through a short sale, those days are excluded. Similarly, if you sold the stock before the 90-day requirement was met, the dividend cannot be may have access to no matter what the issuer says. Many investors miss this requirement because they focus on the ex-dividend date alone and forget about the longer window.

Which preferred stocks never produce may have access to dividends

Some types of preferred stock are disqualified by law, regardless of how long you hold them. Dividends from REITs (real estate investment trusts) are always taxed as ordinary income. The same is true for dividends from MLPs (master limited partnerships) and most publicly traded partnerships. These entities are structured differently from corporations and do not meet the IRS definition of a may have access to corporation.

Preferred stock issued by foreign corporations may also be disqualified. The corporation must be incorporated in the United States, or it must be a may have access to foreign corporation that meets specific IRS tests. Many foreign banks and international companies do not meet these tests. Additionally, preferred stock issued by certain financial institutions during specific periods may carry restrictions. If you own preferred stock from a non-U.S. issuer, check the issuer's tax documentation or ask your brokerage whether the dividend is may have access to.

How to verify the tax status of your preferred dividends

Your brokerage will report the tax status of each dividend on your year-end tax statement, usually Form 1099-DIV. This form separates may have access to dividends from ordinary dividends. Box 1a shows ordinary dividends, and Box 1b shows may have access to dividends. However, the brokerage's classification is not always correct, especially for preferred stock. You should verify it yourself by checking the holding period and the issuer type.

Start by finding the ex-dividend date on the issuer's investor relations website or your brokerage statement. Count backward 90 days and forward 90 days to establish your 180-day window. Check your purchase date and any sale date against this window. If you held the stock for at least 90 days within the window, the dividend may be may have access to—but only if the issuer is a may have access to corporation. If you are unsure about the issuer type, contact the issuer's investor relations department or consult a tax professional before filing your return.

The tax impact of ordinary versus may have access to dividend rates

may have access to dividends are taxed at the long-term capital gains rate, which is 0%, 15%, or 20% depending on your income level. Ordinary dividends are taxed at your marginal income tax rate, which can be as high as 37%. For many taxpayers, this difference is substantial. A preferred stock dividend that misses the may have access to threshold by a few days can cost you significantly more in taxes.

Because preferred stock often carries a higher dividend yield than common stock, the tax impact is even larger. A preferred stock paying 6% annually will generate much more tax liability than a common stock paying 2%. If that 6% dividend is taxed as ordinary income instead of may have access to income, the after-tax return drops sharply. This is why understanding the holding period and issuer type matters more for preferred stock than for common stock.

Cumulative and non-cumulative preferred stock

The structure of the preferred stock—whether it is cumulative or non-cumulative—does not affect whether the dividend is may have access to. Both types are subject to the same holding period and issuer requirements. The difference between them relates to what happens if the company skips a dividend payment. With cumulative preferred stock, skipped dividends accumulate and must be paid before common shareholders receive anything. With non-cumulative preferred stock, skipped dividends are gone forever.

From a tax perspective, this distinction does not matter. Either way, you must meet the 90-day holding period and the issuer requirement for the dividend to be may have access to. Some investors mistakenly believe that cumulative preferred stock receives preferential tax treatment, but the IRS treats both types identically for dividend taxation purposes.

Frequently Asked Questions

Can I hold preferred stock for 90 days after the ex-dividend date and still get may have access to treatment?

No. You must hold the stock for 90 days during the 180-day window that is centered on the ex-dividend date. This means 90 days before and 90 days after. If you buy the stock after the ex-dividend date, you have already missed the opportunity for that particular dividend to be may have access to, even if you hold it for 90 days going forward.

What if my brokerage says the dividend is may have access to but I do not think I held it long enough?

Contact your brokerage and ask them to verify the holding period calculation. Provide them with your purchase date and the ex-dividend date. If they made an error, ask them to issue a corrected 1099-DIV before you file your tax return. If you cannot resolve it with the brokerage, consult a tax professional or contact the IRS directly.

Do I lose may have access to status if I sell the preferred stock before the dividend is paid?

No. The holding period is measured around the ex-dividend date, not the payment date. If you held the stock for 90 days during the 180-day window around the ex-dividend date, the dividend is may have access to even if you sell the stock the day after the ex-dividend date. The payment date does not matter.

Are preferred stock dividends from my employer may have access to?

Employer stock dividends follow the same rules as any other preferred stock. You must meet the 90-day holding period and the issuer must be a may have access to corporation. If your employer is a U.S. corporation, the issuer requirement is met. But if you received the stock through an employee stock purchase plan or restricted stock unit and sold it quickly, you may not have met the holding period.

If a preferred stock is convertible into common stock, does that change the tax treatment?

No. Convertibility does not affect whether the dividend is may have access to. The holding period and issuer requirements remain the same. The fact that you could convert the preferred stock into common stock at some point in the future does not change the current dividend's tax status.