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posted May 22, 2023 10:30:44 AM

Short Sale Dividend

I took a short position on a stock in 2022, which I closed in 2023. I was assessed dividends on the short position in both years. Should the dividend expenses on my short position be deducted in the years those assessments were made (2022 and 2023 separately), or only the year in which I closed my short position (2023)? 

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1 Replies
Level 15
May 22, 2023 11:44:45 AM

premiums paid to the arranging broker and reimbursement of dividends to the stock lender are characterized as investment interest expense and are deductible on schedule A if the short sale is held open at least 46 days in the year paid. for short sales that are closed on or before the 45th day, these expenses increase the tax basis of the stock used to close the short sale IRC 263(h)(1) 

 

note there can be special situations where the above does not apply

(h)Payments in lieu of dividends in connection with short sales
(1)In general
If—
(A)a taxpayer makes any payment with respect to any stock used by such taxpayer in a short sale and such payment is in lieu of a dividend payment on such stock, and
(B)the closing of such short sale occurs on or before the 45th day after the date of such short sale,
then no deduction shall be allowed for such payment. The basis of the stock used to close the short sale shall be increased by the amount not allowed as a deduction by reason of the preceding sentence.
(2)Longer period in case of extraordinary dividends
If the payment described in paragraph (1)(A) is in respect of an extraordinary dividend, paragraph (1)(B) shall be applied by substituting “the day 1 year after the date of such short sale” for “the 45th day after the date of such short sale”.

(3)Extraordinary dividend
For purposes of this subsection, the term “extraordinary dividend” has the meaning given to such term by section 1059(c); except that such section shall be applied by treating the amount realized by the taxpayer in the short sale as his adjusted basis in the stock.

(4)Special rule where risk of loss diminished
The running of any period of time applicable under paragraph (1)(B) (as modified by paragraph (2)) shall be suspended during any period in which—
(A)the taxpayer holds, has an option to buy, or is under a contractual obligation to buy, substantially identical stock or securities, or
(B)under regulations prescribed by the Secretary, a taxpayer has diminished his risk of loss by holding 1 or more other positions with respect to substantially similar or related property.
(5)Deduction allowable to extent of ordinary income from amounts paid by lending broker for use of collateral
(A)In general
Paragraph (1) shall apply only to the extent that the payments or distributions with respect to any short sale exceed the amount which—
(i)is treated as ordinary income by the taxpayer, and
(ii)is received by the taxpayer as compensation for the use of any collateral with respect to any stock used in such short sale.
(B)Exception not to apply to extraordinary dividends
Subparagraph (A) shall not apply if one or more payments or distributions is in respect of an extraordi