If you are SHORT, not long a stock, and it pays a dividend, how to file?

Question

Normally if you are long a dividend-paying stock, you GET the dividend paid TO you. But if you are short a dividend-paying stock, YOU have to pay your broker that dividend. I know when you EARN a dividend while you own the stock you file that on your taxes as dividends earned. But where do you file/claim for dividends PAID on your tax return when you happen to be short the stock and have to PAY the dividend?

Answer 1

When you sell a stock short, you are borrowing the stock from another party. Dividends paid to the owner of the stock during that time are called payments in lieu of dividends. IRS Publication 550, on page55, discusses these payments. Following is an excerpt from that publication. Generally, you deduct such payments as investment interest as long as you hold the short sale open for more than 45 days. If the short sale is open less than 46 days, see the Exception in the excerpt.

Payments in lieu of dividends. If you borrow stock to make a short sale, you may have to remit to the lender payments in lieu of the dividends distributed while you maintain your short position. You can deduct these payments only if you hold the short sale open at least 46 days (more than 1 year in the case of an extraordinary dividend as defined below) and you itemize your deductions.

You deduct these payments as investment interest on Schedule A (Form 1040). See Interest Expenses in chapter 3 for more information.

If you close the short sale by the 45th day after the date of the short sale (1 year or less in the case of an extraordinary dividend), you cannot deduct the payment in lieu of the dividend that you make to the lender. Instead, you must increase the basis of the stock used to close the short sale by that amount.

To determine how long a short sale is kept open, do not include any period during which you hold, have an option to buy, or are under a contractual obligation to buy substantially identical stock or securities.

If your payment is made for a liquidating distribution or nontaxable stock distribution, or if you buy more shares equal to a stock distribution issued on the borrowed stock during your short position, you have a capital expense. You must add the payment to the cost of the stock sold short.

Exception. If you close the short sale within 45 days, the deduction for amounts you pay in lieu of dividends will be disallowed only to the extent the payments are more than the amount that you receive as ordinary income from the lender of the stock for the use of collateral with the short sale. This exception does not apply to payments in place of extraordinary dividends.

Extraordinary dividends. I f the amount of any dividend you receive on a share of preferred stock equals or exceeds 5% (10% in the case of other stock) of the amount realized on the short sale, the dividend you receive is an extraordinary dividend.

Answer 2

1

Answer 3

Any security you sell that you have held for over 1 year is long term and is taxed at 15% (5% if you are in the lower tax brackets). Generally, taxes are not withheld on these transactions. You "pay" the tax when you file your return. If the gain is large, you should probably make an estimated payment. Savings accounts (online or otherwise) are taxed as ordinary income. While they are not short term gains, they are taxed the same as short term capital gains. Dividends are either "Ordinary" or "Qualified". Ordinary dividends are taxed as ordinary income and qualified dividends are taxed the same as long term capital gains.

Answer 4

I'd add it to the basis when you report the eventual sale.