Is there a problem with buying stocks for dividends, then selling them after the ex dividend date?
My strategy is to both buy and short the stock the day before the dividend payment. By both buying and shorting they will cancel each other out. Take the dividend and then cancel both of your trades. Basically, I’m guaranteed the dividend without a loss and only costing me the price of commission. What do you guys think about this? Do you know how these dividends will be taxed on my tax return?
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Tagged with: Buying Stocks • dividend payment • dividends • Ex Dividend Date • stock • tax return • trades
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The dividends will be taxed as (guess what?) "dividends" (see Form 1040 Schedule B) .
The person who provided the shares you shorted did not agree to give up his dividend, so your account will be billed for "cash in lieu of dividend" to pay that person. This is only deductible against investment income, so now you have tax on the dividends but no offsetting deduction.
Why is the cost of commission an "only". You are making zero and paying a commission to do it.
Then there is the "spread". A market maker will have two prices. He sells at the offer and buys at the bid. He makes his money by pocketing the difference. Every time you buy at the offer and sell at the bid you lose the amount of the spread, assuming nothing has changed in the mean time.
So, now you have cash offsetting the dividend for net zero. To get the zero, you are incurring a tax liability, paying two spreads and paying four commissions. Yes there is a problem with this.
When you short a stock that pays a dividend, you have to pay the cost of the dividend to the person you borrowed the stock from.
Nice try, but the market already knows about the dividend and taken into account.
You just got to own the stock by the close of the previous day before the ex-dividend date. Then you can sell it on the ex-dividend date or later.