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Duration: 7:23

Instructor:

Contributor: Interactive Brokers

Level: Beginner

The main topics of this lesson are: Ordinary and Qualified Dividends; Money Market Dividends; and Mutual Fund Dividends. For this lesson, refer to the Study Notes and watch the video for a synopsis.

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Study Notes:

Ordinary dividends

• Distributions from stock shares are dividends.
• Distributions from money market funds and some distributions from mutual funds are also
dividends.
• All payments classified as dividends are ordinary dividends for tax purposes and taxed as
ordinary income.

Qualified dividends

• Dividends paid by US corporations or foreign corporations located in a country with which the
US has a tax treaty or that are listed on a major exchange may be qualified for a lower US
income tax rate.
• There are two criteria to be met for a payment to qualify for a lower tax rate:
o The payment must be from one of the entities described above; and
o You must hold the security for 60-days before or after the payment (own for 60-days in
a 121-day window). Note that the day of purchase is not counted.
• The tax rate for qualified dividends is the long-term capital gains rate, which is lower than
ordinary income rates.

Money Market Dividends

• We often think of money market distributions as interest payments since the underlying assets
are generally interest-bearing instruments rather than stock. However, by definition, money
market funds pay dividends not interest.
• Even municipal money market funds, which contain municipal bonds and US Treasury money
market funds that hold US government securities, pay dividends and not interest.
• Payments from money market funds do not qualify for the lower income tax rate of qualified
dividends.

Mutual Fund Dividends

• Mutual funds can distribute ordinary dividends, ordinary dividends that meet the criteria as
qualified dividends, short-term capital gain dividends and long-term capital gain dividends.
• The source of the funds determines the type of dividend it is.

For example, if a mutual fund holds a security over a year and then sells it generating a
long-term capital gain, the profits are paid out to the mutual fund owners as a long-term
capital gain dividend.

Tax Rates

The tax rates that apply are as follows:
o Ordinary dividend – ordinary income tax rate
o Qualified dividend – long-term capital gain rate
o Short-term capital gain dividend – ordinary income tax rate
o Long-term capital gain dividend – long-term capital gain rate

 

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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Disclosure: Tax-Related Circular 230 Notice

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