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What is a qualified dividend, and how do covered calls affect it?

In one line: A qualified dividend is a US dividend taxed at the lower long-term capital gains rates, which requires holding the stock long enough around the ex-dividend date.

Trading glossary · Updated 2026-10-26

How it works

In the US, many dividends from US companies, and some foreign ones, can be "qualified." Qualified dividends are taxed at the lower long-term capital gains rates. Others, called ordinary dividends, are taxed like regular income.

To qualify, you must hold common stock for more than 60 days during a 121-day window. The window starts 60 days before the Ex-dividend date.

Here's where calls come in. Some option trades cut your risk of loss on the stock, and while they're open, the holding clock can stop. Buying a put does that. So can selling some calls.

Most ordinary covered calls count as "qualified covered calls," which don't stop the clock. Roughly, that's a listed call with more than 30 days left when you sell it, and a strike not too far below the stock price. A call deep in the money can fail that test and pause the holding period. The exact rules are detailed.

This is general information, not tax advice; check with a tax professional or your broker.

An example (hypothetical)

You've owned 100 shares of XYZ for 40 days, bought at $50 (an illustration, not a trade idea). It pays a $1.00 dividend, $100, in three weeks. You sell a 45-day $55 call for $0.80.

With this call, out of the money and more than 30 days out, the holding clock usually keeps running. So the $100 can still be qualified.

Swap in a deep in-the-money $40 call, and the clock may pause while it's open. Then the same $100 could be taxed as ordinary income.

Notice the size of each problem. The tax difference on $100 is a few dollars. The −$420 row is the shares falling, and no tax rule changes that. A math example, not a promise.

Why it matters for sellers

The rule mostly bites sellers who use deep in-the-money calls, often for dividend capture. Ordinary covered calls, sold out of the money with a month or more left, usually aren't the problem.

If you run the wheel strategy on dividend stocks in a taxable US account, keep your call strikes and dates in a journal. That makes the tax check easy later. In an IRA, dividends aren't taxed as they're paid, so this rule doesn't matter there in the same way.

Canada has its own dividend rules, with eligible dividends and a dividend tax credit, and this US rule doesn't apply. In a TFSA or RRSP, covered calls are widely allowed; cash-secured puts depend on the broker.

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