Are All ETF Dividends Qualified for Lower Taxes?
The tax treatment of your ETF dividends isn't automatic. It's determined by the fund's underlying assets and your holding period. Learn how this impacts your taxes.
Exchange-Traded Funds (ETFs) are investment funds traded on stock exchanges that hold assets like stocks, bonds, or commodities. When an ETF generates income from its assets, it may distribute this to shareholders as dividends. However, the tax treatment for these payments is not uniform.
How these distributions are taxed depends on their source and specific IRS criteria. Not all ETF payments receive preferential tax treatment, and understanding the distinction is part of managing an investment portfolio’s tax implications. The character of the income earned by the fund determines the tax character of the shareholder’s distribution.
The Tax Advantage of Qualified Dividends
A qualified dividend is a distribution eligible for lower tax rates than other investment income. The benefit of this classification is that qualified dividends are taxed at the same preferential rates as long-term capital gains. Non-qualified dividends are taxed at an individual’s ordinary income tax rates, which also apply to wages.
For the 2025 tax year, the rates for qualified dividends are 0%, 15%, or 20%, based on an investor’s taxable income and filing status. A single filer with taxable income up to $49,230 would pay a 0% tax rate on qualified dividends. That same individual would pay a 15% rate for income between $49,231 and $538,900, and a 20% rate on income above that amount.
By contrast, ordinary income tax rates for 2025 range from 10% to 37%. A non-qualified dividend could be taxed at 32%, 35%, or 37%, while a qualified dividend would be taxed at a maximum of 15% or 20%. This difference can result in significant tax savings for investors.
Criteria for ETF Dividend Qualification
Whether a distribution is a qualified dividend depends on requirements at both the investor and fund level. The tax character is determined by the ETF’s underlying holdings and the investor’s actions. This means a single ETF’s distribution can be a mix of qualified and non-qualified dividends.
To benefit from lower tax rates, an investor must meet a holding period requirement. The investor must have held the ETF shares for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the cutoff that determines who is entitled to receive the next dividend payment. This rule is in place to prevent investors from buying an ETF just before a dividend is paid and selling it immediately after to capture the dividend at a lower tax rate.
The source of the ETF’s distribution is the other main factor. Dividends from underlying U.S. stocks are the most common source of qualified dividends. If an ETF holds mainly domestic corporate stocks, a large portion of its dividends will likely be qualified, assuming the fund meets its own holding periods for those stocks.
Distributions from other assets are treated differently. Interest payments from bonds or fixed-income instruments held by an ETF are non-qualified dividends taxed at ordinary income rates. Distributions from Real Estate Investment Trusts (REITs) are also not qualified and are often a mix of ordinary income, capital gains, and a return of capital.
A dividend from a foreign corporation may be qualified if the company is in a country with a U.S. income tax treaty. A dividend can also qualify if the stock is readily tradable on a U.S. securities market, such as through an American Depositary Receipt (ADR). If an ETF holds shares in a company that meets neither condition, the dividends from that holding will be non-qualified.
Locating Dividend Information on Tax Forms
Investors do not need to analyze an ETF’s holdings to determine dividend status, as this is done by the ETF provider and brokerage firm. The results are reported to the investor and the IRS on Form 1099-DIV, “Dividends and Distributions.” Financial institutions typically send this form by January 31 of the following year.
When reviewing Form 1099-DIV, two boxes are important. Box 1a, “Total ordinary dividends,” shows all distributions classified as ordinary dividends, including both qualified and non-qualified. Box 1b, “Qualified dividends,” reports the portion of the amount in Box 1a that meets the criteria for lower tax rates and is a subset of Box 1a, not an additional amount.
The amounts in these boxes are transferred to the appropriate lines on the federal income tax return. This distinction allows tax software or a tax preparer to apply the correct tax rates to the different types of dividend income.
Many brokerage firms also provide a consolidated year-end tax statement. This summary includes the same dividend information found on Form 1099-DIV and can be helpful for organizing tax documents.