Qualified vs Ordinary Dividends: The General Rules
U.S. tax law treats dividends in two classes: qualified dividends, taxed at the lower long-term capital-gains rates, and ordinary (non-qualified) dividends, taxed as regular income. This page covers the general concepts only — it is education, not tax advice.
What generally makes a dividend qualified
Two broad tests apply: the payer must be a U.S. corporation or a qualifying foreign one, and the investor must have held the shares beyond a minimum holding period around the ex-dividend date. Most regular dividends from ordinary U.S. companies clear both tests.
Common exceptions are structural: REIT distributions are mostly ordinary income (a share may be return of capital or capital gain), BDC distributions largely track their interest income, and fund distributions inherit the character of what the fund earned — a covered-call fund's option premium does not become qualified by passing through an ETF.
Return of capital, briefly
A distribution labeled return of capital is not taxed when received; it reduces the cost basis of the shares instead, deferring tax until sale. It is common from CEFs, MLP-adjacent structures and covered-call funds, and it is one reason a fund's stated yield and its taxable income can differ substantially.
Rates, thresholds and account treatments change and depend on individual circumstances. Nothing here is personal tax advice — for decisions, consult a qualified tax professional.