I have had multiple of similar cases during my trading years and I have entered the trades in a way that I believe is the right way. However I would like to know how you guys treat this in your tax return. I will tell you how I enter my trade in my tax a little bit later not to bias your mind. The case is: You short 100 shares of a stock for $100 per share and while you are short the stock goes ex-dividend for $2 per share. Then you buy back the stock at $95. What is your profit here in your schedule D? Do you enter you sold at $9800 and bought back at $9500 with $3000 profit without mentioning the dividend? Do you enter you sold at $10000 and bought at $9700 with $3000 profit. Or do you enter that you sold $10000 and covered at $9500 with $5000 profit and add that $2000 dividend as your other cost of investment or do you go ahead and subtrcat that dividend your paid from dividend that you have received from your other investments? I know that your answer might not be right right way and you might advise me to consult with a tax expert but I beileve this is a good tax-trading topic.
From 2002, but probably still applies (do your own due diligence though): http://www.fool.com/personal-finance/taxes/2002/12/06/dividends-paid-on-short-sales.aspx