An investor sells short 500 shares of Microsoft at $100 per share on February 2, 2018. On February 23, 2018, Microsoft pays a $1 per share dividend.

An investor sells short 500 shares of Microsoft at $100 per share on February 2, 2018. On February 23, 2018, Microsoft pays a $1 per share dividend. The short seller pays $500 to the lender of the stock. The lender closes the short sale by purchasing 500 shares at $100 per share and delivers those shares to the lender on March 15, 2018 to close the short sale.

a. The lender is a corporation. Does it get the dividends received deduction with respect to the $500 received from the short seller?
b. How does the short seller treat the $500 payment for tax purposes?
c. What is the short seller’s gain or loss for tax purposes with respect to the short sale?

Expert Solution

1) As per US taxation any dividend received by corporation is allowed to get dividend received deductions.

2)short seller had closed his position within 46 days from creating the short position so it must be increase basis of the stock used to close the short sale by 500$.

3)stock buying price (100+1) = 101 .( As stated above the dividend paid is added to basis of the stock)

Stock selling price - 100$

Total loss - 500 *(101-100)

= $ 500

ekkarill92 answered 2 years ago

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