Dividends are taxed in two different ways depending on the type, and the rate you pay can be significantly lower than your regular income tax rate

may have access to dividends — dividends from stocks you have held for a set period — are taxed at long-term capital gains rates, which are 0%, 15%, or 20% depending on your total income. Ordinary dividends — including dividends from mutual funds, real estate investment trusts (REITs), and stocks you have not held long enough — are taxed as ordinary income at your regular tax bracket rate, which can be as high as 37%.

The difference matters. A dividend taxed as ordinary income at the 37% rate costs you nearly twice as much in taxes as the same dividend taxed as a may have access to dividend at 20%. Your brokerage will report which dividends fall into which category on Form 1099-DIV, which you receive by January 31 each year.

Key Takeaways

  • may have access to dividends are taxed at 0%, 15%, or 20% depending on your income; ordinary dividends are taxed at your full tax bracket rate.
  • To may have access to for the lower rate, you must have held the stock for more than 60 days during the 121-day window centered on the dividend payment date.
  • Dividends from mutual funds, ETFs, REITs, and preferred stock are usually taxed as ordinary income unless the fund itself holds may have access to dividend stocks.
  • Your brokerage reports may have access to and ordinary dividends separately on Form 1099-DIV; you do not have to calculate the distinction yourself.
  • If you sell a stock shortly after buying it, any dividend you received may be reclassified as ordinary income even if it was initially reported as may have access to.

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

A dividend is may have access to only if you held the underlying stock for more than 60 days during a 121-day window. The window starts 60 days before the ex-dividend date — the date on which new buyers are no longer may have access to to the upcoming dividend — and ends 60 days after it.

This rule exists to prevent investors from buying a stock just before a dividend payment, collecting the dividend at a low tax rate, and selling when ready. If you buy a stock on Monday and it pays a dividend on Wednesday, that dividend is ordinary income, not may have access to, no matter what your brokerage initially reports.

The holding period is calendar days, not trading days. Weekends and holidays count. If you bought the stock on January 10 and the ex-dividend date is February 15, you need to still own it on April 15 (60 days after the ex-dividend date) for the dividend to be may have access to.

Dividends that are always taxed as ordinary income

Certain types of dividends cannot be may have access to, regardless of how long you hold them. Dividends from mutual funds and exchange-traded funds (ETFs) are taxed as ordinary income unless the fund itself holds only may have access to dividend stocks and meets other IRS requirements — most do not. A fund that holds bonds, preferred stock, or international stocks will distribute ordinary dividends.

Real estate investment trusts (REITs) are required by law to distribute at least 90% of their taxable income to shareholders. These distributions are almost always ordinary income. Master limited partnerships (MLPs) and preferred stock dividends are also typically ordinary income.

Dividends from foreign companies are ordinary income in the United States, even if the foreign country taxes them at a lower rate. You may be able to claim a foreign tax credit on your return if you paid tax to another country, but the dividend itself is still ordinary income here.

How your tax bracket determines the actual rate you pay

may have access to dividends are taxed at the long-term capital gains rate that corresponds to your tax bracket, not at a flat rate. The three may have access to dividend rates — 0%, 15%, and 20% — align with the ordinary income brackets, but the income thresholds are different.

For 2024, if you are single and your taxable income (including dividends) is $47,025 or less, may have access to dividends are taxed at 0%. From $47,026 to $518,900, they are taxed at 15%. Above $518,900, they are taxed at 20%. These thresholds change each year and are different for married filing jointly, head of household, and other filing statuses.

Ordinary dividends, by contrast, are added to your other income and taxed at whatever bracket you fall into — potentially 10%, 12%, 22%, 24%, 32%, 35%, or 37%. This is why the tax difference can be so large. A person in the 37% bracket pays 37% on ordinary dividends but only 20% on may have access to ones.

How to report dividends on your tax return

Your brokerage sends you Form 1099-DIV by January 31, showing dividends in different boxes depending on type. Box 1a shows ordinary dividends; Box 1b shows may have access to dividends. You do not calculate which is which — your brokerage does, based on the holding period rules and the type of security.

You report these amounts on Schedule B (Interest and Ordinary Dividends) if your ordinary dividends exceed $1,500, or on Form 1040 directly if they do not. may have access to dividends go on Schedule D (Capital Gains and Losses) or Form 8949 (Sales of Capital Assets), depending on the total amount.

If you use tax software, you enter the amounts from your 1099-DIV forms and the software places them in the correct locations. If you file by hand or with a tax professional, they will handle the placement. The key is to keep your 1099-DIV forms and any records of when you bought and sold stocks, in case the IRS questions the holding period.

What happens if you sell a stock shortly after buying it

If you buy a stock, collect a dividend, and sell the stock within 60 days of the ex-dividend date, the IRS may reclassify that dividend as ordinary income even if your brokerage initially reported it as may have access to. This is called the wash sale rule for dividends, though the formal rule is more complex.

The rule applies if you sell at a loss and buy a substantially identical stock within 30 days before or after the sale. For dividends, the concern is similar: if you hold a stock only long enough to collect the dividend and then sell, the IRS views the dividend as part of the sale proceeds rather than a true investment return.

Your brokerage may catch this and correct your 1099-DIV before sending it, or you may need to adjust your return if the IRS flags it. Keep records of all buy and sell dates for at least three years.

State and local taxes on dividends

Federal tax is only part of the picture. Most states tax dividends as ordinary income at their state income tax rate, regardless of whether they are may have access to or ordinary at the federal level. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no state income tax at all.

Some states offer preferential rates for capital gains and dividends. New York, for example, taxes long-term capital gains at a lower rate than ordinary income, but dividends are still taxed as ordinary income. Check your state's tax rules or speak with a tax professional in your state to understand the full picture.

Local taxes in cities like New York City and Washington, D.C. also explore to dividends. These are usually small — 1% to 4% — but they add up when combined with federal and state taxes.

Frequently Asked Questions

Can I avoid the holding period requirement by using a different account?

No. The holding period is based on the stock itself, not the account type. Whether you hold the stock in a taxable brokerage account, an IRA, or a 401(k) does not change whether a dividend is may have access to. However, dividends in IRAs and 401(k)s are not taxed at all when received — you only pay tax when you withdraw money from the account.

What if my brokerage reports a dividend as may have access to but I did not hold it long enough?

You are responsible for correcting the error on your tax return. If you sold the stock within 60 days of the ex-dividend date, you should report the dividend as ordinary income even if the 1099-DIV says may have access to. Keep your trade confirmations to prove the dates. If the IRS audits you, you will need them.

Do I have to pay tax on dividends I reinvest?

Yes. Reinvested dividends are still income in the year you receive them, even if you use them to buy more shares instead of taking cash. You owe tax on the full amount of the dividend, whether you receive it in cash or reinvest it. Your brokerage reports the full amount on your 1099-DIV.

Are stock splits treated the same way as dividends for tax purposes?

No. Stock splits are not taxable events. If a company splits its stock 2-for-1, you now own twice as many shares at half the price per share, but you owe no tax. Dividend reinvestment plans (DRIPs) that automatically buy new shares with dividend payments are also not taxable events for the purchase itself — only the dividend is taxable.

What if I inherited stock that pays dividends?

Dividends you receive after inheriting stock are taxable income to you in the year you receive them. The holding period for may have access to dividend treatment starts from the date you inherited the stock, not the date the original owner bought it. Inherited stock receives a "step-up" in basis, meaning your cost basis is the stock's value on the date of death, which can reduce capital gains tax if you later sell.