Are Dividends Taxed as Capital Gains?

While some dividends receive the same preferential tax rates as long-term capital gains, not all do. A dividend is a distribution of a company’s earnings to its shareholders, and its tax treatment depends on the dividend type and the investor’s holding period. The Internal Revenue Service (IRS) separates dividends into categories that determine how they are taxed.

Differentiating Dividend Types for Tax Purposes

For tax purposes, dividends fall into two primary categories: qualified and ordinary. Qualified dividends must meet specific criteria set by the IRS. The dividend must be paid by a U.S. corporation or a qualified foreign corporation, which includes those incorporated in a U.S. possession or eligible for benefits under a U.S. tax treaty. The shares must also be readily tradable on an established U.S. securities market.

The most significant requirement for a dividend to be qualified is the holding period. An investor must own the stock 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 day for receiving the upcoming dividend payment. For example, if a stock’s ex-dividend date is May 15, the 121-day window is from March 16 to July 14, and the investor must have held the shares for at least 61 days within that timeframe.

Any dividend that fails to meet these criteria is classified as an ordinary, or non-qualified, dividend. Dividends from certain entities, such as Real Estate Investment Trusts (REITs) and master limited partnerships (MLPs), are considered ordinary. Payments in lieu of dividends, which can occur when shares are loaned out, also fall into this category.

Tax Rates for Dividends and Capital Gains

Qualified dividends are taxed at the same preferential long-term capital gains rates of 0%, 15%, or 20%. The specific rate depends on an investor’s total taxable income and filing status. For the 2025 tax year, the 0% rate applies to single filers with taxable income up to $48,350 and married couples filing jointly with income up to $96,700. The 15% rate applies to single filers with income from $48,351 to $533,400 and joint filers with income from $96,701 to $600,050, while the 20% rate applies to incomes above those levels.

Long-term capital gains are profits from selling an asset held for more than one year. While the tax rates are the same, qualified dividends and capital gains are distinct types of income. However, after offsetting capital gains, any net capital loss up to an annual limit of $3,000 can be used to reduce other income, including dividend income.

In contrast, non-qualified dividends are taxed at the taxpayer’s ordinary income tax rates, the same rates that apply to wages and salaries. These rates range from 10% to 37%, depending on income. This tax treatment is identical to that of short-term capital gains, which are profits from selling an asset held for one year or less.

Special Dividend-Related Distributions

Beyond standard dividends, investors may encounter a “return of capital.” This is a distribution of cash that is not from a company’s current or accumulated earnings. Instead of being taxed as income in the year it is received, a return of capital reduces an investor’s cost basis in the stock.

For instance, if you purchased a share for $50 and receive a $2 return of capital distribution, your new cost basis becomes $48. This reduction in basis means that when you eventually sell the stock, your calculated capital gain will be larger. If you continue to receive return of capital distributions after your cost basis has been reduced to zero, any subsequent distributions are then taxed as a capital gain.

Mutual funds and exchange-traded funds (ETFs) may issue capital gain distributions. These occur when the fund sells assets at a profit and passes those gains to its shareholders. These distributions are always considered long-term capital gains for tax purposes, regardless of how long the investor has owned the fund shares.

Reporting Dividend Income on Your Tax Return

Investors receive Form 1099-DIV, “Dividends and Distributions,” from their brokerage for distributions of $10 or more. Box 1a shows the total amount of ordinary dividends. Box 1b reports the portion of that total that is considered qualified dividends, which are eligible for lower tax rates. Box 2a reports any capital gain distributions, such as from mutual funds or REITs.

The information from Form 1099-DIV is transferred to Form 1040. Total ordinary dividends from Box 1a are reported on the corresponding line. If your total ordinary dividends exceed $1,500, you must also complete and attach Schedule B, “Interest and Ordinary Dividends.” The qualified dividend amount from Box 1b is used to calculate the tax using the “Qualified Dividends and Capital Gain Tax Worksheet.”