The vast majority of dividends — i.e., regular payouts from a company to certain stockholders — are considered ordinary dividends, but some are qualified dividends, and the tax treatment is different for each.
While sorting out which type of dividend you have can be confusing, it’s important to know the difference as they are taxed at different rates: Qualified dividends are taxed at the more favorable capital gains rate, while ordinary dividends are taxed as income.
Key Points
• Dividends are regular payouts to certain company shareholders. Not all companies pay dividends.
• Most types of dividends are considered ordinary dividends. Qualified dividends must meet certain IRS criteria.
• Ordinary dividends are taxed as income; qualified dividends are taxed at the more favorable long-term capital gains rate.
• Knowing the types of dividends you have is important for tax planning purposes.
What Are Dividends, How Do They Work?
When a company pays shareholders a portion of company earnings on a regular basis (i.e., quarterly), these payouts are called dividends, and they come in addition to any potential gains from stock performance.
Dividend amounts are set by the company, and investors receive a payout based on the number of shares the investor owns. For example, if a stock pays a quarterly dividend of $0.50 per share and the investor owns 50 shares, they would receive a dividend of $25 each quarter.
Companies are not required to pay dividends, and not all shareholders own dividend-paying stock.
As noted, most dividends are ordinary dividends (non-qualified), but some are qualified dividends that meet certain IRS criteria.
How Are Dividends Paid?
Typically, dividends are paid in cash, and they’re sent by the company directly to your brokerage, which will deposit the money into your account.
Alternatively, you might get dividends as additional shares of stock. Some companies and mutual funds offer the option of a dividend reinvestment plan (DRIP) that will automatically reinvest your dividend payment in additional shares. This has the advantage of both simplifying the process (since you won’t have to receive the cash and then buy more shares yourself), and potentially being less expensive, since many DRIP programs don’t charge commissions on share purchases.
Additionally, some DRIP programs offer the ability to buy additional shares at a discount.
Less commonly, a company might award a property dividend instead of cash or stock payouts. This could include company products, shares of a subsidiary company, or physical assets the company owns.
💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.
What Is a Qualified Dividend?
Certain dividends from holding shares of stock in domestic companies and some foreign companies — and which an investor has held for a minimum period of time — are considered qualified dividends.
Equally important, though, is that qualified dividends are distinct from ordinary dividends, which include capital gains distributions, dividends paid on bank deposits, dividends from tax-exempt corporations, and more.
Qualified dividends are taxed at the lower capital gains tax rate versus ordinary dividends, which are taxed as income. They’re taxed at the long-term capital gains rate, which ranges from 0% to 15% to 20%.
Most people won’t pay more than 15% on qualified dividends, but they might owe as much as 37% in income tax on ordinary dividends. As such, investors typically prefer to receive qualified dividends, but they’re the less common kind of dividend paid out.
Qualified dividends must meet certain requirements:
• The dividend must be paid by a U.S. company or a qualified foreign corporation (i.e., one that’s traded on a U.S. stock exchange).
• The dividend must not be of the type that does not qualify (i.e., it cannot be an ordinary dividend).
• In addition, it’s important to know the holding period, and how often dividends are paid. If you hold common stock, you must have held the shares for more than 60 days during the 121-day period starting 60 days before the ex-dividend date. (That’s the date by which an investor must have purchased shares of a stock in order to receive an upcoming dividend.)
• If you hold preferred stock, you must have held the shares for more than 90 days during the 181-day period starting 90 days before the ex-dividend date.
• A mutual fund must have held the investment unhedged for more than 60 days during the 121-day period starting 60 days before the ex-dividend date, and investors must have held their shares of the mutual fund for the same period.
Recommended: Capital Gains Tax Guide
How to Figure Out If You Have a Qualified Dividend
For investors about to count the number of days they’ve held a stock, they must include the day they sold the stock, but do not include the day they bought it.
Here is an example:
Imagine you bought 1,000 shares of ABC Company common stock on July 2, 2024, and you sold the 1,000 shares on August 11, 2024. ABC Company paid a cash dividend of 25 cents per share with an ex-dividend date of July 15, 2024.
Since you only held shares of ABC Company for 40 days of the 121-day period that began 60 days before the ex-dividend date, you have no qualified dividends from ABC Company, and your Form 1099-DIV from the company should reflect the ordinary dividend amount in box 1a.
What Is an Ordinary Dividend?
In general, investors should assume that any dividend they receive is an ordinary dividend unless they’re told otherwise. The payer of the dividend is required to identify the type of dividend when they report them on Form 1099-DIV at tax time.
Qualified dividends are reported in box 1b on IRS Form 1099-DIV, while ordinary dividends are reported in box 1a.
Certain kinds of dividends are not qualified dividends even if they’re reported in box 1b of your Form 1099-DIV, according to the IRS. The following dividends are on this list:
• Capital gains distributions
• Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U.S. building and loan associations, U.S. savings and loan associations, federal savings and loan associations, and similar financial institutions
• Dividends from a corporation that is a tax-exempt organization or farmer’s cooperative during the corporation’s tax year in which the dividends were paid or during the corporation’s previous tax year
• Dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation
• Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property
• Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends
• Payments shown on Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends
Ordinary dividends must be reported on IRS Form 1040, line 3b, and they are taxed at ordinary income rates, which range from 10% to 37%.
💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.
How Qualified and Ordinary Dividends are Reported at Tax Time
Generally, an investor will receive a Form 1099-DIV — “Dividends and Distributions” — from each institution or company that pays a dividend of $10 or more. This form reports your capital gains distributions, dividend and non-dividend distributions, and any taxes withheld from your payments during that tax year.
Even if an investor does not receive a 1099-DIV from a company, they are still required to report any dividends on their tax return.
On Form 1099-DIV, dividends are reported as follows:
• Box 1a: Ordinary dividends, representing the total dividends paid to you during that tax year
• Box 1b: Qualified dividends, and this will be the portion of total dividends that qualify for the lower tax rate
• Box 3: Non-dividend distributions, which are a nontaxable return of capital
If you have had taxes withheld from your dividends, this will be reported in box 4 for federal taxes, and 14 for state tax withholdings.
The Takeaway
Understanding qualified versus ordinary dividends can help investors make decisions about what account to hold their dividend-paying investments in: Inside a retirement account, such as an IRA, an investor will owe no taxes on dividend income, but they’ll often pay ordinary income taxes on all withdrawals.
Outside a retirement account, an investor will pay lower rates on qualified dividends, and may be able to use dividends to supplement other income or to reinvest in their portfolio.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
SOIN-Q225-017