-Usually he who sells what isn’t his’n goes to prison. But if it’s on Wall Street then it’s called selling short. IRS rules on short sales are discussed in chapters 3 and 4 of Publication 550 .
If you sell short you are selling borrowed stock and must pay the dividend to the person from whom your broker borrowed it. In some cases you may deduct it as investment interest expense on line 13 of Schedule A. In other situations you cannot deduct it as interest expense, but must add it to the basis of the stock when you buy to cover your short position. Here are some excerpts from Pubication 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.
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 below) 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 that 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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This information is not intended to be advice to the recipient. In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.