Dividends Explained: Qualified, Ordinary and Reinvested
How the IRS taxes dividends in a taxable account: what makes a dividend qualified, the 61-day holding period, why reinvested dividends are still income, and how to read Form 1099-DIV.
A dividend is a payment a company makes to its shareholders, usually out of its profits. Funds pass dividends through too: an index fund or ETF that holds dividend-paying stocks collects those payments and distributes them to its own shareholders, along with interest and any capital gains the fund realized. In a taxable brokerage account, those payments are generally taxable in the year you receive them, and the type of payment decides the rate.
This guide explains the federal rules. State taxes on dividends may differ, and this guide doesn’t cover them. Dividends earned inside an IRA, Roth IRA or HSA follow those accounts’ own rules, covered in which account does what.
Ordinary dividends: the starting point
The IRS calls ordinary dividends “the most common type of distribution from a corporation or a mutual fund.” They’re ordinary income, not capital gains (IRS Publication 550, 2025 edition, checked November 9, 2026). Every taxable dividend starts out as an ordinary dividend. The question is whether some or all of it also counts as qualified.
The IRS describes qualified dividends as “those ordinary dividends that qualify to be taxed at lower capital gain rates” (IRS Topic 404, checked November 9, 2026). So a qualified dividend isn’t a separate kind of payment: it’s the part of your ordinary dividends that gets the lower rate.
Qualified dividends: the lower rate and the three tests
Qualified dividends are taxed at the same 0%, 15% or 20% maximum rates that apply to net long-term capital gains (Publication 550). Which rate applies depends on your taxable income, with qualified dividends stacked on top of ordinary income in the same way as long-term gains. The thresholds change each year; the current figures and a worked example of the stacking are in how capital gains are taxed. Dividends that aren’t qualified are taxed at ordinary income rates.
Publication 550 says the lower rate applies only if all three requirements are met:
- The dividends were paid by a US corporation or a qualified foreign corporation.
- The dividends aren’t one of the types the IRS lists as not qualified.
- You meet the holding period.
The types listed as not qualified include capital gain distributions, “dividends” on deposits at credit unions and mutual savings banks (which are really interest), dividends from tax-exempt organizations and farmers’ cooperatives, dividends on employer stock held in an ESOP, and certain payments in lieu of dividends. Publication 550 has the full list.
The holding period: more than 60 days in a 121-day window
For common stock, you “must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date” (Publication 550). The ex-dividend date is the first date after a dividend is declared on which a new buyer is not entitled to that dividend. When counting, include the day you sold the stock but not the day you bought it. Preferred stock has a longer test: more than 90 days in a 181-day window, if the dividends cover periods totaling more than 366 days.
An invented example. A stock’s ex-dividend date is June 1. The 121-day window starts 60 days earlier, on April 2, and runs to July 31 (29 days in April, 31 in May, 30 in June and 31 in July: 121 days).
- Bought May 20 and sold June 10: counting from May 21 through June 10 gives 21 days. That’s not more than 60, so the dividend isn’t qualified and is taxed as ordinary income.
- Bought May 1 and sold July 15: counting from May 2 through July 15 gives 75 days (30 + 30 + 15). That’s more than 60, so this test is met.
The same holding-period test applies to mutual fund shares; Publication 550’s own example shows fund dividends losing qualified status because the shares were held fewer than 61 days. Someone who holds a fund for years will usually meet it without thinking about it. It mainly affects shares bought shortly before a dividend and sold soon after.
Reinvested dividends are still income
Many brokerage accounts and funds let you reinvest dividends automatically to buy more shares. Reinvesting doesn’t change the tax. Publication 550 says that if you use dividends to buy more stock, you still must report the dividends as income, and the Form 1099-DIV instructions tell payers to include reinvested dividends in box 1a (Instructions for Form 1099-DIV, rev. January 2024, checked November 9, 2026).
Two consequences are worth knowing. First, a reinvested dividend can create a tax bill even though no cash reached you. Second, each reinvestment is a purchase, so the new shares have their own basis and purchase date. Keeping those records stops the same money being taxed twice when you eventually sell; cost basis and Form 1099-B explains how. If a company’s dividend reinvestment plan lets you buy shares at a discount, Publication 550 says the stock’s full fair market value on the dividend payment date is reported as dividend income, and that value is your basis.
Because a reinvested dividend buys shares, it can also matter if you sold shares of the same fund at a loss within 30 days before or after the reinvestment; see wash sales and tax-loss harvesting.
Fund distributions that aren’t dividends at all
A fund’s year-end statement can include payments that look like dividends but are taxed differently.
Capital gain distributions. When a fund sells holdings at a profit, it can distribute the gain to shareholders. The IRS says “capital gain distributions are always reported as long-term capital gains” (IRS Topic 404), regardless of how long you’ve owned the fund’s shares (Publication 550). They are not qualified dividends, but they’re taxed at the long-term capital gains rates.
Nondividend distributions (return of capital). Some distributions are a return of your own investment. Publication 550 says a nondividend distribution reduces the basis of your shares and isn’t taxed until your basis is fully recovered; after your basis reaches zero, further nondividend distributions are reported as capital gain.
Exempt-interest dividends. A fund that holds tax-exempt bonds can pay exempt-interest dividends, which are reported separately from ordinary dividends. Publication 550 explains their treatment, including the part that may be subject to the alternative minimum tax.
Money market funds. Publication 550 says amounts from money market funds are reported as dividend income, and that these funds “should not be confused with bank money market accounts that pay interest.”
Reading Form 1099-DIV
Each payer that pays you $10 or more in dividends and distributions for the year sends a Form 1099-DIV (IRS Topic 404 and the Form 1099-DIV instructions). Brokerage accounts often combine it with other forms in a single consolidated statement. The boxes that matter most for a typical fund investor, as the payer instructions describe them:
| Box | What it shows |
|---|---|
| 1a | Total ordinary dividends, including money market fund dividends and reinvested dividends |
| 1b | Qualified dividends: the part of box 1a eligible for the lower rates (already included in 1a) |
| 2a | Total capital gain distributions (long-term) |
| 3 | Nondividend distributions, if determinable |
| 5 | Section 199A dividends, such as qualified REIT dividends |
| 7 | Foreign tax paid on dividends and other distributions |
| 12 | Exempt-interest dividends from a mutual fund or other regulated investment company |
One detail matters for box 1b. The payer instructions allow a payer to include dividends in box 1b when it’s impractical for the payer to determine whether the holding period was met. The holding period is about your own purchase and sale dates, so it’s something to check if you bought or sold shares around an ex-dividend date. Publication 550 lists, among the dividends that aren’t qualified, box 1b payments from a foreign corporation that you know or have reason to know aren’t qualified.
Topic 404 also notes that if your taxable ordinary dividends exceed $1,500, they’re reported on Schedule B. Dividends also count as investment income for the 3.8% net investment income tax at higher incomes (IRS Topic 559, checked November 9, 2026), which the capital gains guide explains.
Why the account matters
Because dividends and fund distributions are taxed each year in a taxable account, people often look at how much a fund distributes, and what kind of distributions it makes, when deciding which account to hold it in. That comparison is covered in asset location, and how funds generate distributions in the first place is in index funds and ETFs explained. How the holding period and the qualified-dividend rules apply to your own return is something a tax professional can confirm.
Common questions
Are reinvested dividends taxable? Yes, in a taxable account. The IRS treats a dividend used to buy more shares the same as one paid in cash, and payers include it in box 1a of Form 1099-DIV.
What makes a dividend qualified? It must be paid by a US corporation or a qualified foreign corporation, must not be a type the IRS excludes, and you must meet the holding period: for common stock, more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
Are capital gain distributions the same as qualified dividends? No. Capital gain distributions are reported as long-term capital gains, regardless of how long you held the fund. They’re taxed at the long-term rates but aren’t qualified dividends.
Is box 1b always right? It’s the payer’s figure. Payers may include dividends there when they can’t determine whether you met the holding period, so the holding period based on your own trade dates still applies.
Do I get a 1099-DIV for small amounts? Payers send a Form 1099-DIV when dividends and distributions reach $10 or more. Publication 550 says that even without the form, all taxable dividend income must still be reported.
Sources checked November 9, 2026: IRS Publication 550 (2025); IRS Topic 404, Dividends; Instructions for Form 1099-DIV (rev. January 2024); IRS Topic 559, Net investment income tax.