In addition, for bonds acquired after June 10, 1987, add to your basis any accrued market discount not previously reflected in basis. Also, you may be allowed to add to the donor’s adjusted basis all or part of any gift tax paid, depending on the date of the gift. Gain or loss from the trading of section 1256 contracts is capital gain or loss subject to the marked-to-market rules. However, this does not apply to contracts held for purposes of hedging property if any loss from the property would be an ordinary loss. Under the marked-to-market system, 60% of your capital gain or loss will be treated as a long-term capital gain or loss, and 40% will be treated as a short-term capital gain or loss. This is true regardless of how long you actually held the property.

The interest you paid or accrued on money you borrowed that is allocable to property held for investment. The amount of interest that would be payable for any period if interest accrued at the applicable federal rate and was payable annually on December 31, minus any interest payable on the loan for that period. A demand loan (defined later) on which interest is payable at a rate below the applicable federal rate, or a term loan where the amount loaned is more than the present value of all payments due under the loan.

If you received interest as a nominee in 2022, you must file a Form 1099-INT for that interest with the IRS. Send Copy A of Form 1099-INT with a Form 1096, Annual Summary and Transmittal of U.S. Information Returns, to your Internal Revenue Service Center by February 28, 2023 (March 31, 2023, if you file Form 1099-INT electronically).

  1. The facts are the same as in Example 1, except that at year end you have $4 of unrecognized gain in the successor long position and $6 of unrecognized gain in the offsetting short position.
  2. If you participate in an automatic investment service, your basis for each share of stock, including fractional shares, bought by the bank or other agent is the purchase price plus a share of the broker’s commission.
  3. Dividends from stocks can be an additional source of passive income allowing individuals to further grow their finances.
  4. It explains how to report the interest income on these bonds and how to treat transfers of these bonds.
  5. Interest will be compounded twice a year at 7½%, but payable only at the end of the 5-year period.
  6. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional.

You can generally exclude from your income up to 50% of your gain from the sale or trade of qualified small business stock held by you for more than 5 years. The exclusion can be up to 75% for stock acquired after February 17, 2009, and no later than September 27, 2010, and up to 100% for stock acquired after September 27, 2010. The exclusion can be up to 60% for certain empowerment zone business stock for gain attributable to periods on or before December 31, 2018. The 60% exclusion doesn’t apply to gain attributable to periods after December 31, 2018. The eligible gain minus your section 1202 exclusion is a 28% rate gain.

In addition, the amount of loss carried back to an earlier tax year cannot increase or produce a net operating loss for that year. An individual having a net section 1256 contracts loss (defined later) can generally elect to carry this loss back 3 years instead of carrying it over to the next year. See How To Report, later, for information about reporting this election on your return. Use the Form 1099-B received from your broker to complete Form 8949, Sales and Other Dispositions of Capital Assets.


Original issue discount (OID) on tax-exempt state or local government bonds is treated as tax-exempt interest. To determine the excludable amount, J and L multiply the interest part of the proceeds ($3,308.00) by a fraction. The numerator (top part) of the fraction is the qualified higher educational expenses paid during the year ($4,000.00). definition of qualified dividends The denominator (bottom part) of the fraction is the total proceeds received during the year ($8,308.00). J and L, a married couple, paid $5,000.00 for a $10,000 denominated Series EE U.S. Savings Bond in January 2006. J and L redeemed (cashed in) the bond in January 2022 for $8,308.00 ($5,000.00 investment + $3,308.00 interest).

What is a dividend?

The capital gains rate is often lower than the tax rate on non-qualified or ordinary dividends. If you are a lower-income individual, you may have to pay no tax to the federal government on the portion of your dividends that are classified as qualified dividends. The IRS rules regarding classification of dividends as ordinary or qualified are complicated and it can be difficult for dividend investors to tell, before receiving a 1099-Div form, how their income from dividends will be taxed. Ordinary dividends are taxed as ordinary income at an individual investor’s regular marginal tax rate. Qualified dividends are taxed at the lower capital gains rate. Dividends paid to investors by corporations come in two kinds – ordinary and qualified – and the difference has a large effect on the taxes that will be owed.

Any distribution the club makes that qualifies as a dividend must be reported on Form 1099-DIV if total distributions to the shareholder are $10 or more for the year. Some mutual funds and REITs keep their long-term capital gains and pay tax on them. You must treat your share of these gains as distributions, even though you did not actually receive them. Instead, they are reported to you in box 1a of Form 2439.

In this case, use the fair market value of each section 1256 contract at the time of termination or transfer to determine the gain or loss. Terminations or transfers may result from any offsetting, delivery, exercise, assignment, or lapse of your obligation or rights under section 1256 contracts. A section 1256 contract that you hold at the end of the tax year will generally be treated as sold at its fair market value on the last business day of the tax year, and you must recognize any gain or loss that results. That gain or loss is taken into account in figuring your gain or loss when you later dispose of the contract, as shown in the Example under 60/40 rule below. A surrender of stock by a dominant shareholder who retains ownership of more than half of the corporation’s voting shares is treated as a contribution to capital rather than as an immediate loss deductible from taxable income. The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains.

A stock right is a right to acquire a corporation’s stock. It may be exercised, it may be sold if it has a market value, or it may expire. See Distributions of Stock and Stock Rights in chapter 1. If, before 1986, you excluded from income the value of stock you had received under a qualified public utility reinvestment plan, your basis in that stock is zero. If you participate in an automatic investment service, your basis for each share of stock, including fractional shares, bought by the bank or other agent is the purchase price plus a share of the broker’s commission.

Another example of a qualified dividend is the one paid by energy infrastructure giant Enbridge (ENB -1.52%). In 2021, the Canadian corporation, which trades on the New York Stock Exchange, paid out $3.34 Canadian dollars (approximately $2.62 to U.S. investors) per share in dividends. Even though it’s a foreign company, Enbridge’s dividend qualifies for a lower tax rate for U.S. citizens as long as they met the holding period requirement.

What is a dividend reinvestment plan (DRIP)?

For this purpose, a related person is any related party described under Related Party Transactions, later in this chapter. This rule does not apply to the retirement of a debt instrument. A redemption or retirement of bonds or notes at their maturity is generally treated as a sale or trade. See Stocks, stock rights, and bonds and Discounted Debt Instruments, later. This chapter explains the tax treatment of sales and trades of investment property.

Qualified Dividends: Definition and Tax Advantages

The IRS Video portal ( contains video and audio presentations for individuals, small businesses, and tax professionals. On, you can get up-to-date information on current events and changes in tax law.. If you receive gross proceeds as a nominee (that is, the gross proceeds are in your name but actually belong to someone else), see the Instructions for Form 8949 for how to report these amounts on Form 8949. For information about additional requirements that may apply, see section 1202 of the Internal Revenue Code. Straddle-by-straddle identification election (Election B).

Special tax considerations for high earners

You must report half the interest earned to the date of reissue. These are inflation-indexed bonds issued at face value with a maturity period of 30 years. The face value plus all accrued interest is payable to you at redemption. This section provides tax information on U.S. savings bonds.

After the basis of your stock has been reduced to zero, you must report the liquidating distribution as a capital gain. Whether you report the gain as a long-term or short-term capital gain depends on how long you have held the stock. See the Form 8949 instructions on how to report your election to defer eligible gains invested in a QOF. For additional information, please see Opportunity Zones Frequently Asked Questions available at /Newsroom/Opportunity-Zones-Frequently-Asked-Questions. Capital gain distributions (also called capital gain dividends) are paid to you or credited to your account by mutual funds (or other regulated investment companies) and real estate investment trusts (REITs). They will be shown in box 2a of the Form 1099-DIV you receive from the mutual fund or REIT.