The core difference: tax rates

Ordinary dividends are taxed as regular income at your ordinary tax rate — the same rate that applies to your salary or wages. may have access to dividends are taxed at lower capital gains rates, which max out at 20 percent for most people, compared to ordinary income rates that can reach 37 percent.

This difference matters because it directly changes how much you owe. A $1,000 ordinary dividend might cost you $370 in federal tax if you're in the top bracket. That same $1,000 in may have access to dividends would cost you $200. The gap narrows at lower income levels, but the may have access to rate is always lower or equal to your ordinary rate.

The IRS doesn't automatically sort your dividends into these categories — your brokerage does. When you receive a 1099-DIV form at tax time, it will show ordinary dividends in one box and may have access to dividends in another. You report them separately on your tax return, and the software or tax preparer applies the correct rate to each.

Key Takeaways

  • Ordinary dividends are taxed at your full income tax rate, while may have access to dividends receive preferential capital gains rates that are significantly lower.
  • Your brokerage determines which dividends may have access to and reports them separately on your 1099-DIV form.
  • To may have access to, you must hold the stock for at least 60 days around the ex-dividend date, and the company paying the dividend must meet IRS requirements.
  • Dividends from most U.S. corporations and many foreign corporations can be may have access to; dividends from REITs, money market funds, and certain other investments are always ordinary.
  • The tax savings from may have access to dividends can be substantial, especially at higher income levels, but the holding period requirement means you cannot simply buy and sell around dividend dates.

When a dividend counts as may have access to

The IRS has strict rules for what makes a dividend may have access to. First, the company paying it must be a U.S. corporation or a foreign corporation whose stock trades on a U.S. exchange. Second, you must have held the stock for at least 60 days during a 121-day window centered on the ex-dividend date — the date by which you must own the stock to receive the dividend.

That 60-day window is tighter than many people expect. If you buy a stock five days before the ex-dividend date and sell it five days after, you've held it for only 10 days. Even though you received the dividend, it won't be may have access to because you didn't meet the holding period. The 121-day window starts 60 days before the ex-dividend date and ends 60 days after it, so you have some flexibility, but you cannot hold the stock for just a few days around the payment date and expect qualification.

There's also a rule about dividends on short sales and dividends paid on stock you borrowed. If you shorted a stock and received a dividend on it, that dividend is ordinary, not may have access to, even if you otherwise met the holding requirement. The IRS treats this as a way to avoid the intent of the may have access to dividend rules.

Ordinary dividends: what they include

Ordinary dividends are the default category. They include dividends from real estate investment trusts (REITs), which are always ordinary no matter how long you hold them. They include dividends from money market funds, bond funds, and most other mutual funds. They include dividends from master limited partnerships (MLPs) and preferred stock dividends in many cases.

Ordinary dividends also include any dividend from a may have access to source that fails the holding period test. If you own shares of Apple for three months and receive a dividend, but you sell the stock two weeks after the ex-dividend date, that dividend becomes ordinary because you didn't hold for 60 days around the ex-dividend date.

Some dividends are ordinary by law regardless of holding period. Dividends paid by U.S. savings bonds, for instance, are always ordinary. Dividends from cooperatives and certain insurance companies are ordinary. If you're unsure whether a specific dividend source qualifies, your brokerage statement or the company's investor relations page will usually say so.

How the holding period rule actually works

The 60-day holding period is measured in calendar days, not trading days. The 121-day window runs from 60 days before the ex-dividend date through 60 days after it. You must hold the stock for at least 60 of those 121 days.

Here's a concrete example: suppose a stock has an ex-dividend date of June 15. The 121-day window runs from April 16 through August 14. If you buy the stock on May 20 and sell it on July 25, you've held it for 66 days within that window, so the dividend qualifies. If you buy on June 10 and sell on July 20, you've held it for only 40 days within the window, so it doesn't may have access to, even though you owned it on the ex-dividend date and received the payment.

Brokerages track this automatically and report it correctly on your 1099-DIV. You don't have to calculate it yourself. But if you're thinking about buying a stock specifically for its dividend, checking the ex-dividend date and your own holding timeline is worth doing before you buy.

Tax brackets and how much you actually save

The tax savings depend on your income level. The may have access to dividend rates are 0 percent, 15 percent, or 20 percent, depending on your tax bracket. If you're in the 10 or 12 percent ordinary income bracket, may have access to dividends are taxed at 0 percent — you owe nothing on them. If you're in the 22, 24, 32, or 35 percent bracket, may have access to dividends are taxed at 15 percent. If you're in the 37 percent bracket, may have access to dividends are taxed at 20 percent.

For someone in the 37 percent bracket, the difference between ordinary and may have access to is 17 percentage points — a substantial savings. For someone in the 12 percent bracket, the difference is 12 percentage points. For someone in the 22 percent bracket, it's 7 percentage points. Even at lower income levels, the may have access to rate is never worse than the ordinary rate.

This is why some investors structure their portfolios to maximize may have access to dividends. But the holding period requirement means you cannot simply chase dividends without committing to hold the stock. If you buy a stock for its dividend and the stock price drops 15 percent before you've held it long enough to may have access to, the tax savings may not offset the loss.

Foreign dividends and special cases

Dividends from foreign corporations can be may have access to if the stock trades on a U.S. exchange and you meet the holding period. Many large foreign companies — Unilever, ASML, Nestlé — trade on U.S. exchanges and pay may have access to dividends. But dividends from foreign corporations that don't trade here are always ordinary, even if you own the stock through an American depositary receipt (ADR).

Some investments never produce may have access to dividends. Master limited partnerships (MLPs) pay distributions that are ordinary income. Preferred stock dividends are sometimes ordinary and sometimes may have access to, depending on the specific security and the company. Real estate investment trusts (REITs) always pay ordinary dividends. If you own a fund that invests in these securities, the dividends the fund pays to you are ordinary.

If you receive a dividend from a company that's in the middle of a merger or acquisition, the dividend may be treated differently depending on the structure of the deal. Your brokerage will report it correctly, but it's worth checking your 1099-DIV to confirm.

What to do with this information at tax time

Your brokerage sends you a 1099-DIV by January 31 each year. Box 1a shows ordinary dividends; Box 1b shows may have access to dividends. You report these on Schedule B (if you have investment income) and then on your tax return. Tax software will ask you for these numbers and apply the correct rates automatically.

If you think your brokerage made an error — if a dividend appears in the wrong box — contact them before you file. They can issue a corrected 1099-DIV. If you've already filed and later discover an error, you can file an amended return (Form 1040-X) to correct it.

Keep records of your purchase and sale dates for stocks that paid dividends, especially if you're close to the 60-day holding period. If the IRS ever questions your return, you'll need to show that you met the holding requirement. Your brokerage statements are usually sufficient proof.

Frequently Asked Questions

Can I buy a stock right before the ex-dividend date and still get a may have access to dividend?

No. You must hold the stock for at least 60 days within the 121-day window centered on the ex-dividend date. Buying a few days before and selling a few days after won't meet that requirement. The holding period is designed to prevent people from buying stocks solely to capture the dividend without taking on real investment risk.

What if I own the stock in a retirement account like an IRA?

The holding period rule still applies, and your brokerage will still report may have access to versus ordinary dividends on your 1099-DIV. However, in a traditional or Roth IRA, you pay no tax on the dividends at all — they grow tax-free inside the account. The distinction between ordinary and may have access to doesn't matter for tax purposes in a retirement account.

Do I have to report may have access to dividends differently on my tax return?

Yes. may have access to dividends go on Schedule B and then to a different line on your tax return than ordinary dividends. Tax software handles this automatically, but if you're filing by hand, make sure you're putting each type in the correct place. Using the wrong line won't change the tax rate applied, but it can trigger an IRS notice.

What happens if a company stops paying dividends after I buy the stock?

If the company cancels its dividend before the ex-dividend date, you won't receive a dividend at all, so there's nothing to report as ordinary or may have access to. If you've already held the stock past the ex-dividend date, you've met the holding requirement for any dividend that was paid, but no dividend means no tax consequence.

Are stock splits or dividend reinvestment plans affected by the holding period rule?

Stock splits don't affect the holding period — your holding period continues uninterrupted. Dividend reinvestment plans (DRIPs) that automatically buy new shares with your dividend do trigger a new holding period for those newly purchased shares, but the original shares' holding period is unaffected. The dividend itself is still reported as ordinary or may have access to based on your original holding period.