Part 1 Income: Wages, Interest, Dividends and Other Income question: qualified-looking dividend

Part 1Income: Wages, Interest, Dividends and Other Income

Ray bought stock on May 1, 2025, the day before its ex-dividend date, received a qualified-looking dividend, and sold the stock on May 20, 2025. How is the dividend taxed?

A As an ordinary dividend, as the holding period was not met
B As a short-term capital gain on Schedule D
C As a return of capital that reduces his basis
D As a qualified dividend at capital gain rates

Show the answer and explanation

Answer: A. As an ordinary dividend, as the holding period was not met

A dividend is qualified only if the stock was held more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Ray held the stock 19 days, so the dividend is taxed at ordinary rates even if the payer reported it as qualified. It remains a dividend, not a capital gain or return of capital. Source: IRC 1(h)(11)(B)(iii); Pub. 550 (2025), Qualified Dividends, Holding period. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake

Relying on the Form 1099-DIV box without checking the shareholder's holding period.

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