The holding period on a stock dividend typically begins the day after it is purchased. Understanding the holding period is important for determining qualified dividend tax treatment.

Calculating a Holding Period

To determine the holding period of an asset, investors start counting each day starting with the day after the date when the asset was acquired, and they stop counting on the day when the asset is disposed of. They use the first day of the holding period as a benchmark date for each following month. This benchmark determines whether the sales date falls outside of the holding period.

Any asset that is held for more than one year is normally considered to be a long-term capital gain or loss. Any asset held less than one year is considered to be a short-term gain or loss. This is important because of the different tax treatments for long- and short-term capital gains.

Qualified Dividends

Meeting the minimum holding period is the primary requirement for dividends to be designated as qualified. For common stock, shares must be held for more than 60 days throughout the 121-day time period, which begins 60 days before the ex-dividend date. Preferred stock must have a holding period of at least 90 days during the 181-day time period that begins 90 days before the stock's ex-dividend date.

Qualified dividends are taxed at a capital gains tax rate of 0%, 15%, or 20%, which is lower than the normal income tax rate for most individuals. Unqualified dividends are commonly taxed at the higher regular income tax rate.