DIV 401Lesson 1 of 90 of 9
- 1How Dividends Are Taxed
- 2Reading Your 1099-DIV
- 3How Return of Capital Is Taxed
- 4Section 1256 and the 60/40 Rule
- 5How Covered Calls Are Taxed
- 6How REIT, BDC and MLP Payouts Are Taxed
- 7Foreign Dividends and Withholding Tax
- 8Which Account Should Hold Your Dividends?
- 9Tax-Loss Harvesting for Dividend Investors
How Dividends Are Taxed
Qualified, ordinary, return of capital: why two $100 dividends can leave you different amounts.
What you’ll learn
- The difference between qualified and ordinary dividends, and the rates for each
- The holding period rule that decides whether a dividend qualifies
- Which common payouts never qualify, from REITs to covered call funds
- How fund distributions are split into different tax buckets
Two investments each pay you $1,000. After tax, one leaves you $850 and the other $760. Same income, different tax treatment. For US investors, how a payout is taxed can matter as much as how big it is, so this course walks through the rules income investors actually run into. Everything here is about US federal tax; your state may add its own.
Qualified and ordinary dividends
Every dividend you receive in a taxable account is one of two kinds:
- Qualified dividends are taxed at the same low rates as long-term capital gains: 0%, 15% or 20%.
- Ordinary (non-qualified) dividends are taxed like wages, at your normal income tax rate, from 10% up to 37%.
| 2025 qualified dividend rate | Single filers, taxable income | Married filing jointly |
|---|---|---|
| 0% | Up to $48,350 | Up to $96,700 |
| 15% | $48,351 to $533,400 | $96,701 to $600,050 |
| 20% | Over $533,400 | Over $600,050 |
On top of that, higher earners pay the net investment income tax: an extra 3.8% on investment income once modified adjusted gross income is above $200,000 for single filers or $250,000 for married couples filing jointly. Those thresholds aren’t adjusted for inflation, so more people cross them each year.
What makes a dividend qualified
Two conditions:
- The right kind of company. A US corporation, or a foreign company that trades on a US exchange or is covered by a tax treaty.
- The holding period. For common stock, you must hold the shares for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. For most preferred stock dividends, it’s more than 90 days in a 181-day window.
Long-term holders meet the holding period without thinking about it. It mainly catches people trading around ex-dividend dates, which is one more reason dividend capture strategies rarely work.
Payouts that usually aren’t qualified
| Payout | Usually taxed as | Where to learn more |
|---|---|---|
| Most REIT dividends | Ordinary income, with a 20% deduction under Section 199A | REIT, BDC and MLP lesson |
| BDC dividends | Mostly ordinary income (it's interest from loans) | REIT, BDC and MLP lesson |
| MLP distributions | Mostly return of capital, with a K-1 form | REIT, BDC and MLP lesson |
| Bond fund and money market payouts | Ordinary income (interest) | |
| Most covered call fund distributions | Ordinary income or return of capital | Covered call taxes lesson |
| Index option funds using Section 1256 | 60% long-term and 40% short-term gains, often with return of capital | Section 1256 lesson |
| Dividends held less than the holding period | Ordinary income | |
| Payments in lieu of dividends | Ordinary income | Happens when your broker lends your shares out from a margin account |
How fund distributions are taxed
An ETF or mutual fund passes through the tax character of what it earned. One distribution can contain several pieces, each taxed differently:
- Qualified dividends from the stocks it holds.
- Ordinary dividends, including interest and short-term gains (which funds report as ordinary dividends).
- Capital gain distributions, taxed at long-term rates however long you’ve owned the fund.
- Return of capital, not taxed now but lowering your cost basis.
You’ll find the breakdown on your 1099-DIV after the year ends. The next lesson goes through it box by box: Reading Your 1099-DIV.
Compare the treatments
Set your income and filing status, and see how much of the same payout you keep under each treatment you’ll meet in this course:
Reinvested dividends are still taxed
If you have dividends reinvested automatically, you still owe tax on them for the year they were paid. The reinvested amount is added to your cost basis, so you won’t be taxed on it again when you sell. Keep good records (your broker usually does) so you don’t pay twice.
Check your understanding
4 questionsA single filer has $60,000 of taxable income including $5,000 of qualified dividends. At what federal rate are the dividends taxed (2025 brackets)?
To get the qualified rate on a common stock dividend, how long must you generally hold the shares?
Which of these payouts is usually taxed as ordinary income rather than qualified dividends?
You reinvest all your dividends automatically. Do you still owe tax on them in a taxable account?
Related lessons
This lesson is for education only and isn’t financial, investment or tax advice. Tickers are used as examples of how things work, not as recommendations. Figures marked as live come from Dividend Duel’s market data and change daily. See our disclosure.