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How capital gains and dividends are taxed differently

Umito October 27, 2024

Dividends are payments you receive from investing in stocks, mutual funds, or exchange-traded funds. They must be included on your tax return (Form 1040) with Schedule B.

Capital gains occur when an asset increases in value between its purchase and sale.

The U.S. tax code provides similar tax treatment to ordinary dividends and short-term capital gains, as well as qualified dividends and long-term capital gains, respectively.

Key takeaways

Dividends are regular payments made by a company to its shareholders from its profits.
Capital gains occurs when an asset is sold and the difference between the purchase and sale prices constitutes a profit.
The amount of income that investors receive in the form of dividends or capital gains is subject to tax.
Short-term capital gains and ordinary dividends are treated the same as ordinary income and taxed at the rate for the appropriate ordinary tax bracket.
Long-term capital gains and qualified dividends are taxed at a rate lower than ordinary income tax rates.

Taxation of capital gains

Capital gains tax rate tend to be more favorable than ordinary income tax rates and depend on how long the seller has owned or held the asset.

Short-term capital gains on assets held for one year or less are taxed at ordinary income rates. Long-term capital gains on assets held for more than one year are taxed at 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 are 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 income of $518,900 or less for 2024 and $533,400 or less in 2025.
You are charged a rate of 20% if your income is above $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 reduce the effective taxes owed. Keep in mind, however, 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 all three rates for all filers in 2024 and 2025:

Maximum amounts of capital gains rates for 2024 and 2025
Filing Status	Maximum amount of the 0% rate for 2024	Maximum rate amount of 15% for 2024	Maximum amount of the 0% rate for 2025	Maximum rate amount of 15% for 2025
Bachelor	$47,025	$518,900	$48,350	$533,400
Married filing separately	$47,025	$291,850	$48,350	$300,000
Head of family	$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 and trusts	$3,150	$15,450	$3,250	$15,900

Tax dividends

Ordinary dividends

Ordinary dividends are treated the same as short-term capital gains. That is, the amounts are subject to the ordinary income tax rate (see federal tax brackets and rates below).

You should receive a Form 1099-DIV for any capital gain (or loss) of a company of which you are a shareholder.

Qualified dividends

Qualified dividends are those paid by eligible domestic or foreign corporations and which were held for at least 61 days out of the 121-day period beginning 60 days before the ex-dividend date.

Qualified dividends are taxed at the same rate as long-term capital gains (see table of maximum amounts for capital gains rates above).

For 2024 and 2025, individuals in the 10% to 12% federal tax bracket are still exempt from all taxes. Investors in the middle bracket (22%, 24%, 32% or 35%) pay the maximum rate of 15% on capital gains. The highest income earners, some of whom are in the upper 35% bracket and 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 the 2024 tax year.

2024 Federal Tax Brackets and Rates
Tax rate 2024	Bachelor	Married filing jointly	Head of family	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 the 2025 tax year:

Federal tax brackets and rates 2025
Tax rate 2025	Bachelor	Married filing jointly	Head of family	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 the capital gains tax rate. The particular rate applied depends on a person’s filing status and whether their income is below or above the maximum rate amounts.

How are capital gains tax rates different from ordinary tax rates?

They are generally lower. For example, as a single filer, your capital gain will not be taxed at all if your income is at or below $47,025 for the 2024 tax year. If it is above that level but at or below less than $518,900, the tax rate is 15%. Anything above this amount is taxed at a rate of 20%.

Where can 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 essentials

Dividends are favored by many investors because they provide a regular source of income from their investments. They are paid from the companies’ profits to their shareholders. In contrast, capital gains occur when there is 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 are subject to similar tax treatments. Ordinary dividends and short-term capital gains are taxed at ordinary personal income tax rates. Qualified dividends and long-term capital gains are taxed at one of three possible long-term capital gains tax rates.

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Internal Revenue Service. “About Schedule B (Form 1040), Ordinary Interest and Dividends“.
Internal Revenue Service. “Topic No. 409, Capital Gains and Losses“.
Internal Revenue Service. “26 CFR 601.602: Tax Forms and Instructions, Rev. Proc. 2023-34“, pages 7 and 8.
Internal Revenue Service. “26 CFR 601.602: Tax Forms and Instructions, Rev. Proc. 2024-40“, pages 7 and 8.
Internal Revenue Service. “Instructions for Form 1099-DIV“, page 2.
Internal Revenue Service. “Form 1099-DIV“.
Internal Revenue Service. “26 CFR 601.602: Tax Forms and Instructions, Rev. Proc. 2023-34“, pages 5 to 7.
Internal Revenue Service. “26 CFR 601.602: Tax Forms and Instructions, Rev. Proc. 2024-40“, pages 5-6.

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