Daniel has 10+ years of experience reporting on investments and personal finance for outlets like AARP Bulletin and Exceptional magazine, in addition to being a column writer for Fatherly.
Updated January 12, 2023 Reviewed by Reviewed by Somer AndersonSomer G. Anderson is CPA, doctor of accounting, and an accounting and finance professor who has been working in the accounting and finance industries for more than 20 years. Her expertise covers a wide range of accounting, corporate finance, taxes, lending, and personal finance areas.
Dividends are income earned by investing in stocks, mutual funds, or exchange-traded funds, and they are included in your tax return on Schedule B, Form 1040. Capital gains are the amount an asset increases in value between when it is purchased and when it is sold. The U.S. tax code gives similar treatment to dividends and short-term capital gains, and qualified dividends and long-term capital gains, respectively.
Capital gains tax rates tend to be more favorable than income tax rates, and they depend on how long the seller owned or held the asset. Short-term capital gains for assets held for less than a year are still taxed at ordinary income rates. However, if you held an asset for more than a year then more preferential long-term capital gains apply. These rates are 0%, 15%, or 20%—depending on your income level.
The 0% long-term capital gains tax rate applies if your income is $41,675 or less for 2022 and $44,625 for 2023. The 15% tax rate applies if you have an income of $459,750 or less and $492,300 or less in 2023. You are charged 20% if your income is greater than $459,750 in 2022. The latter tax rate applies if your income exceeds $492,300 in 2023.
Note that capital losses can be used to offset capital gains in a given tax year by lowering 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.
Ordinary dividends are treated the same as short-term capital gains, those on assets held less than a year, are subject to one's income tax rate. However, qualified dividends and long-term capital gains benefit from a lower rate. Qualified dividends are those paid by domestic or qualifying foreign companies that have been held for at least 61 days out of the 121-day period beginning 60 days prior to the ex-dividend date.
You should receive a Form 1099-DIV for any capital gains (or losses) from the company.
In the case of qualified dividends, these are taxed the same as long-term capital gains. For 2021 and 2022, individuals in the 10% to 12% tax bracket are still exempt from any tax. Investors who fall in the middle brackets—22%, 24%, 32%, or 35%—pay 15% at most in capital gains. The highest earners, including some in the top of the 35% tax bracket and the 37% bracket pay 20% in capital gains.
Dividends are favored by many investors because they provide a regular source of income from investments. These 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 sale and purchase price of an asset. Although dividends and capital gains are different types of investment income, they receive similar treatment at tax time.