Dividends paid by the Fidelity Government Money Market Fund (SPAXX) are taxed as ordinary income at your federal marginal rate, which runs from 10% to 37% in 2026. They never qualify for the lower capital gains rates that apply to qualified dividends. A portion may escape state income tax, because SPAXX holds U.S. government securities whose interest is protected from state taxation under federal law. That is the SPAXX dividend tax treatment in one paragraph; the details below determine how much of it applies to you.
Why SPAXX Dividends Are Ordinary Income
SPAXX is structured as a regulated investment company, so it distributes income to shareholders as dividends reported on Form 1099-DIV. Your brokerage statement labels these payments “dividends,” and they appear in Box 1a as ordinary dividends. Economically, though, the underlying holdings are debt instruments, and the IRS treats the payouts as interest. Publication 550 states directly: “Report amounts you receive from money market funds as interest.”1Internal Revenue Service. Publication 550 – Investment Income and Expenses
Whichever label you use, the federal rate is the same. SPAXX distributions are always ordinary, non-qualified dividends. They do not qualify for the preferential 0%, 15%, or 20% rates on qualified corporate dividends.
Federal Rate on SPAXX Income
Every dollar SPAXX pays is added to your other ordinary income for the year, then taxed at graduated rates. For 2026, the seven brackets run from 10% on the first slice of taxable income up to 37% on income above $640,600 for single filers or $768,700 for married couples filing jointly.2Internal Revenue Service. Federal Income Tax Rates and Brackets
Because SPAXX maintains a stable $1.00 share price, there are no capital gains to worry about when money moves in or out. The entire distribution is ordinary income. Someone in the 24% bracket loses about 24 cents of every dollar SPAXX pays; someone in the 37% bracket loses 37 cents.
The 3.8% Net Investment Income Tax
Higher earners owe an additional 3.8% on top of the ordinary rate. The Net Investment Income Tax applies when modified adjusted gross income exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).3Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax The tax equals 3.8% of the lesser of your net investment income or the amount your MAGI exceeds the threshold.
SPAXX distributions count as net investment income because the statute includes gross income from interest and dividends.3Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax If you owe NIIT, it is reported on Form 8960, which pulls your ordinary dividend total from your return.4Internal Revenue Service. Instructions for Form 8960 For a 37% bracket taxpayer who also owes NIIT, the effective federal rate on SPAXX income reaches 40.8%.
State Tax and the U.S. Government Securities Exemption
Federal law prevents states from taxing interest earned on direct obligations of the United States. The statute, 31 U.S.C. § 3124, exempts both the obligations themselves and the interest on them from state and local taxation.5Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation When SPAXX holds Treasury bills or notes, the income from those specific holdings passes through to shareholders with its exempt character intact.
Not all SPAXX income qualifies. The fund also holds agency securities and repurchase agreements, and income from those instruments does not carry the same state exemption. Each year, Fidelity publishes a supplemental document, “Percentage of Income from U.S. Government Securities,” breaking down the qualifying portion for each fund. For the 2025 tax year, Fidelity reported that approximately 50.90% of the Fidelity Government Money Market Fund’s income came from U.S. government securities.6Fidelity. 2025 Percentage of Income From U.S. Government Securities The percentage changes year to year as holdings shift.
Watch your state’s rules. Several states impose a minimum threshold, typically 50% of assets in U.S. government obligations at the end of each quarter, before any of the fund’s income qualifies for the exemption. If the fund falls below the threshold, the entire distribution is taxable at the state level, including the portion that came from Treasuries. Connecticut, for example, uses a 50% threshold. With SPAXX’s government securities percentage hovering near 50-51%, the fund sits close to that line. Other states allow you to exclude the exact percentage of qualifying income with no minimum. The difference between a 50% exemption and zero depends entirely on where you live.
Calculating Your State Exclusion
If your state allows the exemption and SPAXX meets any applicable threshold, the math is direct. Take the total ordinary dividends from SPAXX in Box 1a of your 1099-DIV and multiply by the government securities percentage from Fidelity’s supplemental letter. Subtract the result from your state taxable income.
If SPAXX paid you $1,000 in ordinary dividends and the government securities percentage is 50.90%, you exclude $509 from your state return. The remaining $491 stays fully taxable at the state level. Fidelity typically releases the supplemental letter in early February and posts it on its tax information page.7Fidelity. Fidelity Mutual Fund Tax Information Keep it with your tax records. The percentage does not appear on your 1099-DIV, and tax software will not pull it in automatically.
SPAXX Held Inside an IRA
Everything above assumes a taxable brokerage account. In a retirement account, the picture changes.
Inside a traditional IRA or traditional 401(k), SPAXX dividends accumulate without any current tax. You receive no 1099-DIV for the account, and you owe nothing until you take a withdrawal. When you do withdraw, the entire amount comes out as ordinary income regardless of what generated it inside the account. The state exemption on government securities income disappears here, because traditional IRA withdrawals are taxed as ordinary income without regard to the character of the underlying investments.8Fidelity. Roth IRA Taxes Explained
In a Roth IRA, SPAXX dividends grow tax-free. Qualified withdrawals after age 59½, once the account has been open at least five years, are tax-free at both the federal and state level. You funded the account with after-tax dollars, so there is no deduction going in, but there is also no tax drag on the way out.
Estimated Tax Payments on SPAXX Income
Fidelity does not withhold federal or state taxes from SPAXX dividends. If your SPAXX income is large enough to create a meaningful bill and you do not have sufficient withholding from other sources, you may need quarterly estimated payments to avoid an underpayment penalty.9Internal Revenue Service. Pay As You Go, So You Wont Owe: A Guide to Withholding, Estimated Taxes, and Ways to Avoid the Estimated Tax Penalty
The IRS generally will not penalize you if you owe less than $1,000 at filing, or if you have paid at least 90% of your current-year tax, or 100% of your prior-year liability (110% if your prior-year AGI exceeded $150,000). These are the safe harbors. A few hundred dollars of SPAXX income on an emergency fund typically stays within the $1,000 cushion. Six or seven figures parked in SPAXX while you wait to deploy capital is a different story. The IRS underpayment interest rate was 7% for the first quarter of 2026 and dropped to 6% for the second.
Forms You Need at Tax Time
Two documents drive the reporting:
- Form 1099-DIV, sent by Fidelity by mid-February. Box 1a shows your total ordinary dividends from SPAXX, which you report on your federal return.10Internal Revenue Service. About Form 1099-DIV, Dividends and Distributions
- Fidelity’s U.S. Government Securities Supplemental Letter, a separate PDF listing the percentage of each fund’s income from government obligations. Use the row for the Fidelity Government Money Market Fund to calculate your state exclusion.6Fidelity. 2025 Percentage of Income From U.S. Government Securities
The 1099-DIV amount goes on your federal return as ordinary income. For your state return, multiply Box 1a by the government securities percentage and subtract the result from your state adjusted gross income, if your state allows the exclusion and the fund meets any applicable threshold. Most tax software has a field for this adjustment, but you enter the percentage manually.
If you also owe the NIIT, your SPAXX dividends feed into Form 8960 as ordinary dividends on Line 2.4Internal Revenue Service. Instructions for Form 8960 The form determines whether your total net investment income or your excess MAGI produces the smaller number, then applies the 3.8% rate to that amount. Keep the 1099-DIV, the supplemental letter, and Form 8960 together at tax time; each addresses a different layer of the same income.