Short selling stocks, Dividends and Tax

Question

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?

Bob Baerker · Accepted Answer

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.

Short selling stocks, Dividends and Tax

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