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If I short sell a stock XYZ to Buyer B and I am short the stock on the ex-dividend date, I pay the lender the dividend. The dividend tax rate is 20%.

Does the lender have to pay the dividend tax on the dividend that I pay them, even though the company pays Buyer B the dividend for the borrowed shares I sold? And Buyer B pays the 20% dividend tax on their dividend as well?

Am I correct in thinking that two dividends are being paid but the company is paying only the one dividend to Buyer B and I am paying the lender the gross dividend too?

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There are 3 people (A, B, and C). B borrows the stock from A and sells it to C

A owns the stock in book entry form

B is short the shares

C owns the actual shares

No new shares have been created in this process. However, a new long position and a new short position have been created.

In the USA, if a dividend occurs, C receives the dividend from the company and A receives a payment-in-lieu from B, the short seller. A drawback is if the lender was due a qualified dividend, he loses that status and the payment-in-lieu is taxed at the higher regular income tax rate.

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  • Thank you! I have been stuck on the "payment-in-lieu" part for quite a while. This has perfectly answered my question and shorted out my confusion. Thanks! Dec 5 '20 at 18:38

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