Where do I enter my investment expenses for "Dividends paid on short positions"?

[stellingp]

These are direct expenses on stocks sold short -- the company paid a dividend while I held the short position, so the dividend amount was withdrawn from my account to pay to the holder of the "borrowed" stocks sold short. These expenses are not reflected in the 1099-DIV, so where do I enter them?

[TomYoung · Accepted solution]

Pub 550 covers this:
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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 later) 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

you make to the lender. Instead, you must increase the basis of the stock used to close the

short sale by that amount
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Tom Young

[jtsacoyeanes]

I cannot deduct this that way unless the total of all my deductions exceeds the standard deduction.  It doesn't make any sense to me that I must include dividends I receive as income and cannot deduct dividends I pay out directly against the dividend income I received.  It would have been advantageous to me to increase the cost basis instead.

[jammuell]

How do you account for a Payment in lieu of dividends when the short sale was less than 45 days and the short position was taken in December as well as the Payment in lieu of dividends was made in December,  but the close of the short sale occurred in January the following year.  The statement from my broker does not contain the basis of the stock as the transaction would not appear until next years taxes.

Do I use the last stock price in December as cost basis and adjust for Payment in lieu of dividends? 

..or..

Do I wait until next year to adjust the basis?

Any Advice?

[fanfare]

Your short sale was closed in January.

In order to close a short you must go to the market and acquire some securities.

Thus,

The acquired date is the date you closed the short sale.

For Stocks, the disposed date is two business days later (settlement)..

Note: Date Acquired and Date Disposed refer to Columns (b) and (c) on Form 8949 that you will report to the IRS, next year.
Your trade date is the date you closed the trade and goes in (b). Settlement date must be calculated taking into account weekends and market holidays .

[hightecher]

How do you handle situation when the short was initiated and closed in December, but the dividend was paid in January?

I am not if sure Fidelity adjusted the basis for 2018 tax documents.

Now I see a note on the 2020 1099 about short dividend charged on 1/2/2019.

[ip53]

Pub 550 says:

"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 you make to the lender. Instead, you must increase the basis of the stock used to close the short sale by that amount."

and then

"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 you receive as ordinary income from the lender of the stock for the use of collateral with the short sale. "

What does the Exception mean? It does not seem to make sense since if you close the short sale within 45 days, you can't take a deduction, period. You are directed to adjust the cost basis.

So, can I add the dividend amount to the basis if I closed the short sale in under 45 days or not? I did not receive any payments from the lender of the stock (i.e., from my broker) for its use. Does anyone get such payments?

[GeorgeM777]

The exception in the IRS Publication does not include the full statute citation.  The Internal Revenue Code section that relates to payments in lieu of dividends in connection with short sales begins at IRC 263(h).  The exception you included in your post which comes from IRS Publication 550 is taken, in part, from IRC 263(h)(5)(A) which, in full, states the following:

(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.

Thus, the exception relates to conduct by the lending broker.  And yes, if you closed the short sale prior to the expiration of the 45th day, you can increase your basis by the dividend amount. 

@ip53 

[Taxdecoder]

So I find this rule a bit odd in the fact that if you short for 45 days or less you can add the dividends paid to your cost basis (which is favorable) but if you hold the short position longer than 45 days you can deduct it only if you itemize your deduction.  So, if you don't itemize deductions, can we add it to the basis of the stock?  The below statements seem a little conflicting to me.

From Pub 550
Short sales. If you cannot deduct payments you make to a lender in lieu of dividends on stock used in a short sale, the amount you pay to the lender is a capital expense, and you must add it to the basis of the stock used to close the short sale.

See Payments in lieu of dividends, later, for information about deducting payments in lieu of dividends.

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 later) 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.

[fanfare]

there is no contradiction, 

adding the dividend to the basis is not the same as taking a deduction on Schedule A,

although the effect may be the same.

In other words,

If you cannot itemize, add the dividend to the basis.

You would have to adjust your basis yourself  on Form 8949 (code B) since the broker won't know what you did.

A short is always a short term capital gain or loss.

[Taxdecoder]

Hi fanfare,

To clarify my understanding of what you stated with an example:

Let's say I shorted QQQ between Jan 1, 2022 and Dec 31, 2022 and paid my broker a total of $1000 in quarterly dividends during the 2022 year.  Further, I use the standard deduction for 2022 as I don't itemize.

In the above case, I can add $1000 to my cost basis?

Thanks!