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Series 7 practice questionmediumTax Implications — Dividend Taxation

An investor receives a $5,000 dividend from a domestic corporation. The investor purchased the stock 30 days before the ex-dividend date and sold it 40 days after. How is the dividend taxed?

  1. AAs a qualified dividend at preferential rates✓ Correct answer
  2. BAs an ordinary (non-qualified) dividend at the investor's marginal rate
  3. CAs tax-exempt income
  4. DAs a capital gain
Explanation

Why A — As a qualified dividend at preferential rates

Qualified dividend treatment generally requires the investor to hold the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Holding the stock 30 days before and 40 days after the ex-dividend date gives a 70-day holding period in that window, so the dividend qualifies for preferential qualified-dividend rates.

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