When it comes to owning stock, everyone deserves his or her slice of the pie in the form of a dividend, but that’s if the company pays one. Dividends come in all shapes and sizes, and they’re all treated differently from a tax perspective. Companies can issue cash dividends or stock dividends, and, occasionally some can even throw in a special dividend if they love really their shareholders.


Generally, cash dividends for a fully paid stock position will appear on your Form 1099-DIV. Meanwhile, stock dividends may affect your overall cost basis.

Cash Dividends

Taxes are inevitable with cash dividends, but they can be taxed differently based upon how long you have held the stock. Welcome to the world of ordinary dividends and qualified dividends.


Ordinary dividends, just as the name implies, are taxed the same way as short-term capital gains, or at your ordinary income tax rate. This applies to positions held for 60 days or less during the 121-day period that begins 60 days before and after the ex-dividend date.


On the other hand, dividends become qualified when the position is held for 61 days or more within the 121-day period. Why does this matter? Qualified dividends are assessed as long-term capital gains, or in other words, a lower tax rate.


If you were confused by the last sentence, don’t worry. Admittedly it can get a little confusing in word form, so we attempted to visualize it below.

Qualified Dividend Example for XYZ Stock
60 Days Prior
XYZ Ex-Dividend Date
($0.10)

60 Days After
May 1, 2017
June 30, 2017
August 29, 2017

Example 1: Ordinary Dividends
  • Purchase 100 XYZ on May 22nd
  • Collect the dividend
  • Close 100 XYZ on July 10th
  • Position held for 49 days
  • The $10 dividend payment ($0.10 x 100 qty) is subject to short-term capital gains

Example 2: Qualified Dividends
  • Purchase 100 XYZ on May 22nd
  • Collect the dividend
  • Close 100 XYZ on August 8
  • Position held for 73 days
  • The $10 dividend payment ($0.10 x 100 qty) is subject to long-term capital gains

Example 3: Ordinary Dividends & Qualified Dividend 
Purchased 100 XYZ on May 22nd
Ordinary Dividend
Qualified Dividend
  • Close 50 XYZ on July 10th
  • Position held for 49 days
  • The $5 dividend payment ($0.10 x 50 qty)
  • Close 50 XYZ on August 8
  • Position held for 73 days
  • The $5 dividend payment ($0.10 x 50 qty)

Example 4: Qualified Dividends
  • Purchase 100 XYZ on May 22nd
  • Collect the dividend
  • The $10 dividend payment ($0.10 x 100 qty) is subject to long-term capital gains
  • Position not closed

Dividends that are automatically reinvested through DRIP, or Dividend Reinvestment Plan, are also subject to taxes and are treated according to the holding period.

There is one exception to cash dividends, and that applies to any stock position purchased on margin. Cash dividends from stock positions held on margin may appear on a 1099-MISC, instead of the 1099-DIV, which can potentially nullify the eligibility of a qualified dividend.

To learn more about Short-Term vs. Long-Term capital gains then please click here.

Special Dividends
If you were fortunate enough to get some extra love from your positions in the form of a special dividend, then Uncle Sam wants some of that love as well. Special dividends can fall into one of three categories: return on capital, long-term capital gains, and short-term capital gains (ordinary income).