Tax treatment of dividends paid on short positions
"In the USA there are two ways this situation can be treated. First, if your short position was held less than 45 days. You have to (when preparing the taxes) add the amount of dividend back to the purchase price of the stock. That's called adjusting the basis. Example: short at $10, covered at $8, but during this time stock paid a $1 dividend. It is beneficial for you to add that $1 back to $8 so your stock purchase basis is $9 and your profit is also $1. Inside software (depending what you use) there are options to click on ""adjust the basis"" or if not, than do it manually specifically for those shares and add a note for tax reviewer. Second option is to have that ""dividednd payment in lieu paid"" deducted as investment expence. But that option is only available if you hold the shorts for more than 45 days and itemize your deductions. Hope that helps!"