What’s the Difference Between Capital Gains and Dividends?

Investing can generate returns as capital gains and dividends. While both represent a profit from an investment, they are distinct concepts with different origins. Understanding these differences is part of managing investment income, as the way they are generated directly impacts how they are taxed.

How Each is Generated

A capital gain is a profit that occurs when a capital asset, like a stock, bond, or real estate, is sold for a price higher than its original purchase price. The gain is only “realized” upon the sale of the asset; this means the profit is not a taxable event until the investor sells. The original purchase price, including any commissions or fees, is known as the cost basis.

For instance, if an investor purchases 100 shares of a stock at $50 per share, their cost basis is $5,000. If they later sell all 100 shares when the price has risen to $70 per share, their proceeds are $7,000. The resulting capital gain is the difference between the sale proceeds and the cost basis, which in this case is $2,000.

Dividends are not generated by an investor’s action of selling but by a company’s decision to distribute a portion of its earnings to its shareholders. A company’s board of directors determines if a dividend will be paid, how much it will be, and when it will be distributed. This decision is based on the company’s profitability and financial health, representing a way to share corporate success with its owners.

An investor holding shares in a company that declares a dividend receives a payment for owning the stock on a specific date. For example, if a company declares a quarterly dividend of $0.50 per share, an investor who owns 200 shares will receive a payment of $100. This income is derived from the company’s operational profits, not from fluctuations in the stock’s market price.

Tax Treatment Comparison

The tax treatment of capital gains is determined by how long the asset was held before being sold. A gain from an asset held for one year or less is classified as a short-term capital gain. Short-term gains are taxed at the investor’s ordinary income tax rates, which for the 2025 tax year range from 10% to 37%. This means the profit is added to other income, like wages, and taxed accordingly.

Gains on assets held for more than one year are considered long-term capital gains and receive more favorable tax treatment. These gains are taxed at rates of 0%, 15%, or 20%. The specific rate an investor pays depends on their total taxable income. For the 2025 tax year, a single filer with taxable income up to $48,350 pays 0%, while those with income from $48,351 to $533,400 pay 15%, and those with income above that threshold pay 20%.

The taxation of dividends also falls into two categories: non-qualified and qualified. Non-qualified, or ordinary, dividends are taxed at the same ordinary income tax rates as short-term capital gains. Qualified dividends are eligible for the same 0%, 15%, and 20% tax rates that apply to long-term capital gains, provided they meet specific IRS criteria.

To be qualified, the dividend must be paid by a U.S. corporation or a qualified foreign corporation, and it cannot be a type of distribution that is specifically excluded, such as from a tax-exempt entity. The investor must also meet a holding period requirement. For common stock, the investor must have held the shares for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Higher-income investors may also be subject to an additional 3.8% Net Investment Income Tax (NIIT) on both capital gains and dividends if their modified adjusted gross income exceeds certain thresholds, such as $200,000 for single filers.

Reporting on Your Tax Return

Brokerage firms issue Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, which details the sale of assets. This form provides the necessary information, such as sale proceeds, cost basis, and acquisition and sale dates, to calculate capital gains or losses.

For dividend income, investors receive Form 1099-DIV, Dividends and Distributions. Box 1a of Form 1099-DIV shows the total amount of ordinary dividends, while Box 1b indicates the portion of those dividends that are considered qualified.

Capital gains and losses calculated from the data on Form 1099-B are first reported on Form 8949, Sales and Other Dispositions of Capital Assets. The totals from Form 8949 are then summarized on Schedule D, Capital Gains and Losses, which is attached to the main Form 1040.

The amounts shown in Box 1a and Box 1b of Form 1099-DIV are reported directly on the appropriate lines of Form 1040. The tax return instructions guide the filer in separating the qualified dividends from the non-qualified portion, which is included with other ordinary income.