Dividends can be classified either as ordinary or qualified. Ordinary dividends are taxable as ordinary income (not capital gains), and qualified dividends that meet certain requirements are taxed at lower capital gain rates.
Dividends are considered qualified dividends if all of the following apply:
- The dividends were paid by a US corporation or a qualified foreign corporation.
- You meet a holding period requirement. The stock must have been held for greater than 60 days in the 121 days prior to the ex-dividend date.
- The dividends do not fall under any of the following categories:
- Capital gain 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. (Report these amounts as interest income.)
- 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.