Can Capital Gains Offset Dividends?

Paying taxes on the money you make from investing is one of the downsides of profiting from investments such as stock. However, the tax code allows you to account for your stock earnings in ways that minimize how much you owe in taxes. Capital gains and dividends are two different ways that investments pay off, so they can't offset one another for tax purposes.

Dividends and capital gains represent two very different ways to earn money by investing in stock. Dividends are regular payments that some businesses pay their stockholders, independent of the stock's market price. Capital gains are profits earned when investors sell stock for more than it cost to purchase and manage over the years. Taxpayers must claim dividend income, which businesses report to tax agencies and their shareholders using 1099-DIV forms, as ordinary investment income. They must claim capital gains, which they calculate using the federal Schedule D form, separately. Each type of income is added to taxable income.

Because capital gains and dividends both refer to payments to an investor, they can't offset one another, even indirectly. However, capital losses can impact the effect of dividends and income from other sources on a taxpayer's tax bill. Capital losses are financial losses that a taxpayer reports due to selling stock for less than it cost to purchase and manage. On Schedule D, capital losses offset capital gains. This is why some investors sell off stock that has lost value during the same years when they sell stock for a profit, to minimize the tax on that profit.

Capital losses can also offset ordinary income. Investors can apply up to $3,000 of capital losses each year to reduce ordinary, taxable income. Losses over $3,000 can offset ordinary income in future years. For a year in which an investor sells some stock for a loss, and sells other stock for a profit, the tax savings from claiming reduced capital gains (or a capital loss, if the loss is greater than the gains) may be enough to make up for tax liabilities from dividend income.

Investors only need to claim capital gains and losses when they sell stock. However, they must claim dividends each year they receive them. One way to offset dividend income directly and consistently is by itemizing your deductions and claiming your investment expenses. You can deduct any money you pay for investment advice, broker fees, stock software and attorney costs related to managing your stock portfolio. These deductions reduce your taxable income, which is the same figure that dividend income contributes to.