Dividends are payments made by a corporation to its shareholders, representing a distribution of the company’s earnings. They are one of the ways investors can earn a return on their stock investments, alongside capital gains. Dividends differ from interest in that interest is paid on loans or bonds and is a fixed amount, whereas dividends are variable and depend on the company’s profitability. Capital gains, on the other hand, are realized when an asset is sold for more than its purchase price.
Dividends are classified into two types for tax purposes: qualified and non-qualified. Qualified dividends are taxed at the lower long-term capital gains tax rates, which are 0%, 15%, or 20%, depending on your taxable income and filing status. To be considered qualified, dividends must be paid by a U.S. corporation or a qualified foreign corporation, and the shares must have been held for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
Non-qualified dividends, also known as ordinary dividends, are taxed at the higher ordinary income tax rates. These dividends do not meet the criteria for qualified dividends, such as not holding the stock long enough or the dividends being paid by certain foreign companies or entities.
While qualified dividends are taxed at LTCG rates, dividends are not capital gains and cannot be negated by capital losses. Thus if you had $10K in dividends and a $23K long term capital loss, your dividends are taxed. You use $3K of the capital loss to offset ordinary income, and carry over the remaining $20K.