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According to NerdWallet, qualified dividends are dividends that:

  1. It is paid by a U.S. corporation or qualifying foreign entity. For many investors — be they in stocks, mutual funds or ETFs — this one’s easy to satisfy.

  2. It is actually a dividend in the eyes of the IRS.

This makes it sound like all stocks or ETFs paying a dividend are paying out qualified dividends. Meaning that, as long as I hold that stock/ETF long enough (more than 60 days I think for common stock), then it's a qualified dividend and is eligible for cap gains tax rate.

Is this correct? If I have a dividend paying stock in my portfolio, how would I know whether a dividend is qualified or non-qualified?

Do all dividends start as non-qualified dividends and then they become classified as qualified dividends after the 60 day threshold?

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You're probably following up on your query here.

As I've mentioned there - usually when people talk about "qualified dividends", what they mean is "dividends qualified for the IRC Sec. 1(h)(11) treatment". That section defines dividends that qualify for special tax treatment and taxed at capital gains rates.

You'll need to read the section for specifics and exclusions, but in essence it's a dividend paid by a US corporation, or a qualified foreign corporation, in which you've held shares for more than 60 days within a 121 days period around the ex-dividend date.

If I have a dividend paying stock in my portfolio, how would I know whether a dividend is qualified or non-qualified?

You'll need to check the requirements in the IRC Sec. 1(h)(11) and confirm that the dividend qualifies based on these requirements. Usually brokers do that for you and categorize the dividends qualified in 1099-DIV (box 1b).

Do all dividends start as non-qualified dividends and then they become classified as qualified dividends after the 60 day threshold?

Non-qualified dividends are just.... dividends. Sometimes referred to as "ordinary dividends". So yes, all dividends start as non-qualified dividends, and after you satisfy the holding period requirement some may become qualified. Others may become qualified for other treatments (for example in your earlier question you were asking about dividends qualified for Sec. 199A treatment).

Some dividends don't qualify because they're not paid by a qualified entity (see the IRC Sec. 1(h)(11) for definitions and exclusions). For example if the paying entity is not a corporation but rather is something else (trust maybe). Others may not qualify because they're not actually dividends but are rather capital gains distributions, returns of capital, or something else.

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  • So just to clarify. I buy a common stock share of a publicly traded US corporation for $100 on Jan 1 and I plan to hold it forever. It pays its dividend (as a share of profits, not LTCG or ROC, etc.) at the end of each quarter. When the first dividend is paid to me at the end of Q1, that dividend will be classified as a qualified dividend and will be taxed as a long term capital gain because I have held it for longer than the holding period. Is this all correct?
    – sparaps
    Aug 31, 2023 at 8:11
  • @sparaps if the corporation doesn't belong to any of the exceptions listed in the section - yes.
    – littleadv
    Aug 31, 2023 at 8:37

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