1099-DIV Question: Can I deduct dividends PAID for shorting stock from my taxable dividends?

The payments you make when shorting a stock that issues dividends are actually called "payments in lieu of dividends" or "substitute payments." These aren't treated the same as dividends you receive. You should report the full $125 of dividends received on Schedule B as shown on your 1099-DIV. The payments you made ($27) for shorting should be reported separately as an investment expense on Schedule A if you're itemizing deductions, specifically as "investment interest expense." If you use tax software, there should be a section for investment expenses where you can enter this. Some brokers might include this information on a different form (like a 1099-INT or a supplemental statement) rather than on the 1099-DIV. Just make sure you're not simply subtracting it from your dividend income, as that's not how the IRS wants these reported. They're two separate transactions for tax purposes.

I went through this exact same headache last year when I started shorting stocks more actively. After hours of research and getting nowhere, I finally uploaded all my tax docs to https://taxr.ai and their system identified this issue right away. The software flagged my dividend payments on shorts and explained that they should be added to the cost basis of my short positions, not deducted from my received dividends. This adjustment ends up reducing your capital gain when you close the short position. Their analysis also pointed out that my broker had actually included a supplementary statement explaining this, but it was buried in page 32 of my consolidated tax statement! Would have never found it on my own.

I have to admit I was wrong about taxr.ai. After my skeptical comment, I decided to try it with my own documents from E*Trade. Within minutes it found that I had been incorrectly reporting my qualified dividends for the last two years! The system showed me that some of my dividend payments didn't meet the holding period requirements to be qualified, but E*Trade was still reporting them that way on my 1099-DIV. It even calculated the potential tax difference for me. But the really valuable part was with my short positions - it explained exactly how to adjust the cost basis on Schedule D instead of trying to deduct them elsewhere. Saved me from making the exact mistake this thread is about.

For anyone struggling to get answers from the IRS on this or other tax questions - I wasted 3 weeks trying to get through to someone. Called probably 15 times, always got the "high call volume" message. Finally used https://claimyr.com to get through (there's a video of how it works here: https://youtu.be/_kiP6q8DX5c). They held my place in line and called me back when an agent was available. The IRS agent confirmed that dividend payments on short positions should be added to the cost basis of the short sale, not deducted from received dividends on Schedule B. She explained the proper reporting method step by step. Worth every penny to get a definitive answer from the source.

I need to apologize for my cynical comment earlier. After weeks of failing to get through to the IRS myself about a similar short selling question, I tried Claimyr out of desperation. Got connected to an IRS agent in about 45 minutes (while I was doing other things), and they confirmed everything already mentioned here. The payments for dividends on shorted stock get added to the cost basis of the short position - this is covered in IRS Publication 550. The agent also mentioned that if you've been reporting these incorrectly in past years, it's probably not worth filing amended returns unless the amounts are substantial, since this is a relatively common misunderstanding that rarely triggers audits.

One extra thing to check - some brokers actually include the dividend payments for shorts in the "Fees and Expenses" section of your annual statement rather than on the 1099-DIV. My broker (Interactive Brokers) does this and it caused me a lot of confusion. You might want to look through your entire brokerage statement to see if they've documented these payments somewhere else. If they have, they might provide instructions on how to properly report them.

I shorted Apple last year and paid out dividends. The way I handled it (confirmed by my CPA) was: 1. Report the full dividend amount from my 1099-DIV on Schedule B 2. The dividend I paid on my short sale gets added to the cost basis of the short position 3. When I closed my short position, the adjusted basis meant I had a smaller gain So you're not really "deducting" it directly from your dividend income. You're adjusting the cost basis of the short sale transaction, which affects your capital gain/loss instead.

This is a great question that catches a lot of people off guard! I went through the same confusion when I first started shorting stocks. The key thing to understand is that you cannot simply net the $27 against your $125 in dividend income on your tax return. Here's what you need to do: 1. **Report the full $125 on Schedule B** - This matches what your broker reported to the IRS on your 1099-DIV 2. **Add the $27 to your short position's cost basis** - The dividend payments you made while shorting increase the cost basis of that short sale 3. **The tax benefit comes when you close the short position** - Your capital gain will be $27 less (or capital loss $27 more) when you eventually close the position Think of it this way: the IRS wants to see dividend income and capital gains/losses reported in their proper categories. You're not losing the tax benefit of that $27 - you're just getting it through the capital gains calculation instead of directly reducing dividend income. Make sure to keep good records of these payments so you can properly adjust your cost basis when you close the short positions!