Are Stock Dividends Taxable?
- The IRS defines dividends as "distributions of property that a corporation pays you because you own stock in that corporation." Most dividends are in cash, but companies also often opt to distribute dividends in the form of company stock; rarely do corporations opt to distribute another type of property.
- Most dividends are paid out of a corporation's profits and are termed "ordinary dividends"; this money is taxable and should be reported as income. Other noncash dividends are taxable if you had an option to take cash and instead took stock, or if multiple types of stock were distributed as dividends to shareholders.
- Dividends are taxable at a preferred rate if they're "qualified dividends." The IRS defines qualified dividends as those that are paid by a U.S. corporation or a qualified foreign corporation --- see the list of qualified foreign corporations in Publication 550 --- and if the stock has been held for at least 60 days. The dividend can also not be on the list of dividends that must pay the normal rate; this list is also found in Publication 550. The preferred rate for qualified dividends is 5 percent if your tax bracket is below 25 percent, and 15 percent if you're in a tax bracket that's more than 25 percent.
- Capital gains are a category that carries a favorable tax rate that's granted to profits made from selling capital assets, including stocks. Capital assets are personal possessions that could be sold for a profit, including everything from financial products such as stocks, to property such as cars and houses, to possessions such as antique collections and silverware. However, capital gains are specifically profits made from selling capital assets; since dividends are made from holding certain kinds of stock, dividends are considered income.
- Occasionally, a corporation will distribute further stock options tax-free --- you should receive a statement from the company explaining the tax status. Corporations may also pay back some of the money you spent buying the stock, called "return of capital." Return of capital isn't taxed, but the IRS clearly states that these payments aren't considered dividends for tax purposes.