I am short an ETF and will pay the dividend to whoever owns the ETF, in lieu of dividend. However, most of my dividend income is in the form of qualified dividends.
Will the payment in lieu of dividend get treated separately from my qualified dividend income or will it partially cancel out my qualified dividend income for tax purposes?
Let's say I pay out $100 in payment in lieu of dividend, but receive $200 worth of qualified dividends. Will I simply get taxed as having $100 worth of qualified dividend income or will I get to claim a loss on the $100 paid and a gain on the $200 received? The latter has more favorable tax treatment (gain $200 at 15% qualified tax rate, deduct loss on $100 at ordinary income tax rate).