Tax question

Discussion in 'Trading' started by StasDesy, Jun 9, 2008.

  1. StasDesy


    Hi All,
    How is the dividends paid by a short seller to the holder of the stock is treated from tax stand point?
    Is it considered to be a regular dividend (taxed 15% max) or is it taxed like short term gains (at max 35%)?
  2. Payments in lieu of dividends are not qualified dividends and are taxed at ordinary tax rates.
  3. StasDesy


    But how a poor bag holder knows that his equities were borrowed for shorting and that his dividend (however small) will be taxed as if he made a killing?

    It seems really unfair to the people that buy and hold the stock and have no control over which shares are borrowed by the short sellers.
  5. vjay


    It's taxed as dividend income. You still own the stock. Besides,how would anyone know if their particular stock is loaned to a short ,since it's all in street name.
  6. Completely and utterly WRONG.

    For the correct information read IRS Notice 2003-67 The Jobs and Growth Tax Relief Reconciliation Act of 2003—Information Reporting for Payments in Lieu of Dividends.
  7. vjay


    You are utterly RIGHT and I stand corrected. As I sit here on the stupid bench, I advise others reading this thread to completely ignore my previous incorrect statement.
  8. vjay

    Thank you for being man enough to admit you were wrong - that is rare here on ET. A little research goes a long way to avoid posting incorrect information.
  9. piezoe


    Now i'm really confused.
    So to whose account is the dividend credited to when it is paid, the short seller or the person the stock is borrowed from?

    And how does the person who holds the stock long know what route the dividend took to get to him? In other words, how does he know the dividend is a payment in lieu of a dividend?

    If the company pays the dividend and it is simply a bookkeeping matter of getting it to the right person, why should it be considered a payment in lieu of a dividend?

    And finally, if the company pays the dividend, and it is credited to the short's account, then the short should not have to pay it again, but merely transfer it to the long's account.

    If the company pays the dividend, and it is not credited to the short's account, but the short has to make a payment in lieu of a dividend to the person from whom the stock is borrowed, then where does the dividend paid by the company end up?

    What am i missing here? (A brain perhaps?):confused:
  10. vjay


    You missed not counting the "new" long who bought the shares from the short seller. so now there are two longs entitled to a dividend. The new long gets the dividend credited normally and the short seller now owes the old long the dividend, which he (via his broker) pays to the old long's broker. Because of the change in IRS
    rules it's called "payment in lieu of dividend" and I guess the old long's Broker has some method of allocating who gets a normal dividend or the "payment in lieu of dividend" to their clients.
    Don't forget that the short seller made money when the stock dropped by the amount of the dividend on ex-dividend day.
    I hope this made sense
    #10     Jun 13, 2008