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Dividends are income earned by investing in stocks, mutual funds or exchange-traded funds, and they are included in your tax return on Schedule B, Form 1040. Capital gains are the amount an asset increases in value between when it is purchased and when it is sold. The U.S. tax code gives similar treatment to dividends and short-term capital gains, and qualified dividends and long-term capital gains, respectively.

Ordinary Dividends

Ordinary dividends and short-term capital gains, those on assets held less than a year, are subject to one's income tax rate. However, qualified dividends and long-term capital gains benefit from a lower rate. Qualified dividends are those paid by domestic or qualifying foreign companies that have been held for at least 61 days out of the 121-day period beginning 60 days prior to the ex-dividend date.

Qualified Dividends

In the case of qualified dividends and long-term capital gains, as of 2018, individuals in the 10% to 15% tax bracket are still exempt from any tax. Investors who fall in the middle brackets—25%, 28%, 33%, or 35%—pay 15% at most in capital gains. The highest earners, in the 39.6% bracket pay 20% in capital gains (plus 3.8% net investment income tax, per the Patient Protection and Affordable Care Act.)

So, although dividends and capital gains are different types of investment income, they receive similar treatment at tax time. (For related reading, see: Investment Tax Basics for All Investors.)

  1. Are qualified dividends included in ordinary dividends?

    Qualified dividends are included with ordinary dividends in Box 1a of the Internal Revenue Service Form 1099-DIV; the box ... Read Answer >>
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  1. Qualified Dividend

    A type of dividend to which capital gains tax rates are applied. ...
  2. Dividend

    A dividend is a distribution of a portion of a company's earnings, ...
  3. Capital Gains Treatment

    The amount of time a stock is owned before being sold determines ...
  4. Capital Gain

    Capital gain is an increase in a capital asset's value that is ...
  5. Gross Dividends

    Similar in concept to gross income, gross dividends are the sum ...
  6. Stock Dividend

    A dividend payment made in the form of additional shares, rather ...
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