eli5: Qualified Dividends vs Capital Gains Tax


I am reporting qualified dividends from some stocks this year, which I believe I will be taxed on. Am I then taxed on the same money when I sell the shares under the capital gains tax? Is that being taxed on the same income gain?

In: 3

I believe qualified dividends are those dividends that are taxed as capital gains. Unqualified dividends are taxed as earned income. What makes a dividend as qualified vs unqualified I will leave for someone else.

You owe taxes on dividends whether you sell your stock or not. If you also sold your stock for a gain then you owe capital gains on BOTH the qualified dividends they paid you AND the profit from selling the stock (amount sold for minus the cost basis of the sold stock).


I should have added that being taxed on selling a stock at a capital gains rate generally means that you held that stock for at least a year before selling it. If you sell without holding it for a year you generally have to pay earned income rate for the profit

No, you are not taxed on the same money. They are two separate transactions.

You will pay taxes on the dividends, which are money that the company has paid out to your for being a shareholder.

When you sell your stock (assuming it went up), you will be taxed on the increase in price only. The company has no part in this transaction and the dividends you’ve received pay not part in this.

If the money you made comes from the company giving you a little piece of their own profits, that’s called a qualified dividend, and you don’t have to pay as much tax on it.

If the money you made comes from selling something you own for more than you paid for it, that’s called a capital gain, and you have to pay a little bit more tax on it.

Sometimes this confusion comes from when dividends are reinvested which you can do with stocks and mutual funds. But the reinvested dividends will raise your cost basis which is usually tracked by your custodian. So no, you won’t be taxed twice.

Dividends are entirely separate from the capital gains. They are recurring payments, but don’t affect share price. You are not being double taxed on that amount.

If you sold a stock at $100 that you paid $50 for, you’d pay capital gains taxes on $50 no matter if the company paid you $0 dividends or $5 in dividends during the year. If you did get $5 in dividends, you’d then pay taxes on that, too.