Will Trice <wwtrice[at]paragondynamics.com> writes:

- quote -

Well, annoying, anyways. But I'm not sure what else could
have been done given that dividend double-tax issue was
"resolved" by cutting the tax rate the investor experiences.
So you can't give the "fake" dividend qualified status, because
then you'd be giving qualified status to more money than the
company actually paid out in dividends! (Note that there's
an analogous issue when there's a proxy fight and your shares
have been lent out)

It would have been far, far less complicated and much more rational to
keep taxing dividends the same as other ordinary income but allowing
corporations to get a tax deduction for dividends paid (like it is
done in many countries). But as rational and simple as that may be,
it was politically impossible.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

Thanks, Rich! That's kind of a nasty tax loophole isn't it...

-Will

Will Trice <wwtrice[at]paragondynamics.com> writes:

- quote -

I have a margin account in which I hold shares of XYZ. Without me
knowing (as is the broker's right under the margin account agreement),
my broker lends those shares to another customer S who short-sells them
to buyer B. B either takes physical delivery, or has a cash account,
or has a margin account but the shares don't happen to be lent out
until the ex-div date or later.

Now XYZ pays a dividend on a day when. B gets the dividend because he
owns the stock. My broker will charge S a fee equal to the dividend and
will credit it to my account.

The dividend that B got is actually from XYZ and qualifies for the 15%
tax rate. But *I* didn't get anything from XYZ. I got a payment from S.
Therefore that payment does *not* qualify for the 15% rate.

- quote -

That's basically correct. Shares for use in short sales can only
come from people who have agreed to lend them. That means customer
margin accounts (and big institutions -- many mutual funds pick up
some extra money by allowing some of their holdings to be lent out
for a fee).

What's not been clear to me is whether shares in one's account can be
lent out by the broker at any time or only when there's a debit
balance in the account.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

Rich Carreiro wrote:
- quote -

Can you guys expand on this? When is a dividend a "fake" dividend and
thus might need the brokerage to compensate for it? I don't have a
margin account, so I'm not familiar with this. It sounds like you're
saying that only shares in a margin account can be used for short sales
by another customer. Is that true?

Thanks!
-Will

BreadWithSpam[at]fractious.net writes:

- quote -

Though a number of brokers have announced that they will compensate
customers in that situation. For example, Fidelity will pay cold hard
cash to customers that have gotten "fake" dividends and thus had to
pay higher taxes (and will gross up for the effect that the payments
from Fidelity are themselves taxable).

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

"jt" <daft[at]hotmail.com> writes:

- quote -

What confusing accounting and weird settling of trades?

- quote -

In theory, if your dividend-paying stock in your margin
account was lent out and a dividend came in and the
borrower of that stock paid you cash in lieu of the
divident, apparently that cash does not get the recent
advantageous tax-treatment that dividens were given under
Bush's tax cut.

- quote -

Easy enough to avoid. Don't have check/debit card on your
brokerage account. Hell, I won't have such a beast on my
checking account. But if you're into debit cards, get one
on your checking account and when you need cash for it,
do an electronic funds transfer from your brokerage account
over to your checking account.

But, really, I think it's best to avoid debit cards
altogether. Unless you find yourself so undisciplined
that you cannot pay off a credit card every month, there's
really no reason to have a debit card instead.

- quote -

You are pretty well protected against the brokerage "wildly
lending out their shares". I've never heard of a case where
that has caused anyone trouble.


--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

I'm wondering if the margin feature is pretty bad idea for typical
brokerage accounts? Assume you have no intention to use it except for
a less than once in a lifetime probability emergency, like a short sale
for a few mega-bear months. I guess you could get the same effect
without margin by buying bearx mutual fund and paying a short term
trading fee.

The downside of margin accounts (besides misusing them, but assume you
don't misuse and probably don't even employ the features) seems to be
very confusing accounting and weird settling of trades, weird handling
of dividends and possible loss of tax advantages, and huge exposure to
check or debit card fraud linked to your cash account - true? Again, I
am talking about things that happen to a passive customer not explicity
using margin, but the effects of the brokerage wildly lending out their
shares or a crook accessing the lendable cash...