:max_bytes(150000):strip_icc()/high-school-students-5bfc2b8b46e0fb0083c07b7d.jpg "How Capital Gains and Dividends Are Taxed Differently")
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Dividends are payments that you receive by investing in stocks, mutual funds, or exchange-traded funds. They should be included on your tax return (Form 1040) with Schedule B.
Capital gains occur when an asset increases in value from when it is purchased to when it is sold.
The U.S. tax code gives similar tax treatment to ordinary dividends and short-term capital gains, and qualified dividends and long-term capital gains, respectively.
Key Takeaways
- Dividends are regular payments made by a company to its shareholders from its earnings.
- Capital gains occur when an asset is sold and the difference between purchase and sale prices is a profit.
- The amount of income that investors receive from dividends or capital gains is subject to taxes.
- Short-term capital gains and ordinary dividends are treated the same as ordinary income and taxed at the rate for the appropriate ordinary income tax bracket level.
- Long-term capital gains and qualified dividends are taxed at a rate that is lower than ordinary income tax rates.
Taxing Capital Gains
Capital gains tax rates tend to be more favorable than ordinary income tax rates, and they depend on how long the seller owned or held the asset.
Short-term capital gains for assets held for one year or less are taxed at ordinary income rates. Long-term capital gains for assets held for longer than one year are taxed at the preferential rates of 0%, 15%, or 20%. The particular rate depends on your income level and filing status.
- The 0% long-term capital gains tax rate applies if you’re a single filer and your income is $47,025 or less for 2024 and $48,350 for 2025.
- The 15% tax rate applies if you have an income of $518,900 or less for 2024 and $533,400 or less in 2025.
- You are charged 20% if your income is greater than $518,900 in 2024 or $533,400 in 2025.
Note that capital losses can be used to offset capital gains in a given tax year to lower the effective taxes due. Keep in mind, though, that only short-term losses can offset short-term gains, and only long-term losses can offset long-term gains.
Here are the maximum capital gains amounts for the three rates for all filers in 2024 and 2025:
| Maximum Amounts for Capital Gains Rates for 2024 and 2025 | ||||
|---|---|---|---|---|
| Filing Status | 2024 Maximum 0% Rate Amount | 2024 Maximum 15% Rate Amount | 2025 Maximum 0% Rate Amount | 2025 Maximum 15% Rate Amount |
| Single | $47,025 | $518,900 | $48,350 | $533,400 |
| Married Filing Separately | $47,025 | $291,850 | $48,350 | $300,000 |
| Head of Household | $63,000 | $551,350 | $64,750 | $566,700 |
| Married Filing Jointly | $94,050 | $583,750 | $96,700 | $600,050 |
| Surviving Spouse | $94,050 | $583,750 | $96,700 | $600,050 |
| Estates & Trusts | $3,150 | $15,450 | $3,250 | $15,900 |
Taxing Dividends
Ordinary Dividends
Ordinary dividends are treated the same as short-term capital gains. That is, the amounts are subject to one’s ordinary income tax rate (see the federal tax brackets and rates below).
You should receive a Form 1099-DIV for any capital gains (or losses) from a company in which you’re a shareholder.
Qualified Dividends
Qualified dividends are those paid by domestic or qualifying foreign companies and 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 are taxed at the same rate as long-term capital gains (see the Maximum Amounts for Capital Gains Rates table above).
For 2024 and 2025, individuals in the 10% to 12% federal tax brackets are still exempt from any tax. Investors who fall in the middle brackets—22%, 24%, 32%, or 35%—pay the 15% rate at most on capital gains. The highest earners, including some in the top of the 35% tax bracket and in the 37% bracket pay the 20% rate on capital gains. See the federal tax brackets for 2024 and 2025 below.
Federal Tax Brackets
Here are the federal tax brackets and rates that apply for tax year 2024.
| 2024 Federal Tax Brackets and Rates | ||||
|---|---|---|---|---|
| 2024 Tax Rate | Single | Married Filing Jointly | Head of Household | Married Filing Separately |
| 10% | $0 to $11,600 | $0 to $23,200 | $0 to $16,550 | $0 to $11,600 |
| 12% | $11,601 to $47,150 | $23,201 to $94,300 | $16,551 to $63,100 | $11,601 to $47,150 |
| 22% | $47,151 to $100,525 | $94,301 to $201,050 | $63,101 to $100,500 | $47,151 to $100,525 |
| 24% | $100,526 to $191,950 | $201,051 to $383,900 | $100,501 to $191,150 | $100,526 to $191,950 |
| 32% | $191,951 to $243,725 | $383,901 to $487,450 | $191,151 to $243,700 | $191,951 to $243,725 |
| 35% | $243,726 to $609,350 | $487,451 to $731,200 | $243,701 to $609,350 | $243,726 to $365,600 |
| 37% | $609,351 or more | $731,201 or more | $609,351 or more | $365,601 or more |
And here are the federal tax brackets and rates that apply for tax year 2025:
| 2025 Federal Tax Brackets and Rates | ||||
|---|---|---|---|---|
| 2025 Tax Rate | Single | Married Filing Jointly | Head of Household | Married Filing Separately |
| 10% | $0 to $11,925 | $0 to $23,850 | $0 to $17,000 | $0 to $11,925 |
| 12% | $11,926 to $48,475 | $23,851 to $96,950 | $17,001 to $64,850 | $11,926 to $48,475 |
| 22% | $48,476 to $103,350 | $96,951 to $206,700 | $64,851 to $103,350 | $48,476 to $103,350 |
| 24% | $103,351 to $197,300 | $206,701 to $394,600 | $103,351 to $197,300 | $103,351 to $197,300 |
| 32% | $197,301 to $250,525 | $394,601 to $501,050 | $197,301 to $250,500 | $197,301 to $250,525 |
| 35% | $250,526 to $626,350 | $501,051 to $751,600 | $250,501 to $626,350 | $250,526 to $375,800 |
| 37% | $626,351 or more | $751,601 or more | $626,351 or more | $375,801 or more |
How Are Dividends Taxed?
Ordinary dividends are taxed at ordinary income tax rates. Qualified dividends are taxed at a capital gains tax rate. The particular rate applied depends on a person’s filing status and whether their income is under or above maximum amounts for the rate.
How Do Capital Gains Tax Rates Differ From Ordinary Tax Rates?
They are lower, in general. For example, as a single filer, your capital gain won’t be taxed at all if your income is at or below $47,025 for tax year 2024. If it’s higher than that level but at or below $518,900, the tax rate is 15%. Anything above that amount is taxed at a 20% rate.
Where Would I See If I Have Qualified Dividends?
Qualified dividends are shown in box 1b of Form 1099-DIV, which you should receive from the financial institution or company that paid the dividends.
The Bottom Line
Dividends are favored by many investors because they provide a regular source of income from investments. They are paid from the earnings of companies to their shareholders. Capital gains, on the other hand, occur when there’s a positive difference between the prices at which an asset is bought and sold.
Although dividends and capital gains are different types of investment income, they receive similar tax treatments. Ordinary dividends and short-term capital gains are taxed at an individual’s ordinary income tax rate. Qualified dividends and long-term capital gains are taxed at one of three possible long-term capital gains tax rates.