Tax offset on paid dividends

Submitted by bnabin51 t3_11co35x in wallstreetbets

Consider a company XYZ is trading for $10. Then I shorted 100 shares and received $1000. Suppose the company provided a dividend of $1 per share and price got adjusted to $9. I had to pay $100 as a dividend. Suppose the stock price rose to $9.5 and I decided to buy back the short positions for $950. Do I need to pay tax for $50 ($1000 - $950) or reduce net taxable profit by $50 ($1000 - $100 - $950)?

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VisualMod t1_ja40q7l wrote

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VisualMod t1_ja40qvl wrote

>If you shorted the stock and then bought it back, you would need to pay tax on the $50 profit.

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Telinger t1_ja430ad wrote

Replying to bnabin51 (#2,029,898)

If you don't own the shares then you don't get the dividends. An option is a right to purchase or sell, not ownership of the underlying stock.

In your case you ignore the dividends since you never recieved it.

0

Objective_Night748 t1_ja43hyr wrote

Maybe you won, maybe you lost, but best of all you can still eat crayons.

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emielbo2 t1_ja45bgi wrote

Its counted as investment interest in the US, assuming you hold the position for longer than 45 days. If you held it for shorter than 45 days the cost gets added to your purchase cost. In the end both results are the same (increasing your cost base), just the item on your taxes changes.

Edit: for tax purposes you made a loss (option 2).

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Telinger t1_ja4jcir wrote

Replying to Unknownirish (#2,033,008)

If he bought a put and was assigned he would own the stock. If he then held the stock through the ex-dividend date then he would get the dividends. However, this is not how I read OP's post.

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no_simpsons t1_ja53jsk wrote

Replying to Telinger (#2,030,296)

if you short the shares, you pay the dividend. it could be different line items on the 1099, capital gain and investment interest expense, which theoretically offset each other, but technically are in different buckets.

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chinnick967 t1_ja5g9es wrote

You don't ever pay dividends, the company does.

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bnabin51 OP t1_ja5gkx4 wrote

Replying to chinnick967 (#2,039,304)

From what I have understood so far, if I shorted stock, I need to borrow the shares from someone else. The company pays dividends to the one who bought from me. However, I need to pay the person from whom I borrowed the shares, don't I?

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chinnick967 t1_ja5hcd9 wrote

Replying to bnabin51 (#2,039,386)

If you received the dividend payment, that will go back to the whomever you borrowed the shares from. You do not need to pay anything extra to the lender of the shares.

That dividend payment will not be considered capital gains and you will not need to pay tax on it.

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bnabin51 OP t1_ja5j3ik wrote

Replying to chinnick967 (#2,039,716)

I don't think this sounds reasonable.

Suppose a company has a total of 1000 shares and I own all of them. If you borrowed them from me and sold them to Elon Musk. Does the company pay dividends to both me and Elon Musk?

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