What Happens If I Am Short a Stock Over the Ex-Dividend Date?

Short sellers pay dividends. They never collect them.

The reason is the borrow. When you sell short, your broker lends you shares that belong to someone else, and that owner still expects every dividend the shares would have paid, even though the shares were sold on to a buyer who now receives the real dividend from the company. Two people are owed one dividend. You fund the second.

That charge is called a payment in lieu of dividend. It posts as a debit around the payment date.

When you owe it

The cutoff is the ex-dividend date. If your short is still open at the end of the business day before the ex-date, you owe the dividend, and if you open the short on the ex-date or later, you do not, because by then the list of holders entitled to the payment has already been fixed.

Under the T+1 settlement date cycle, the ex-date and the record date are generally one and the same day, which is why the day before the ex-date is the last one that matters, and why covering by then generally means you avoid the charge. Confirm the cutoff with your broker for any dividend you care about.

Why it is often close to a wash

On the ex-date, the stock usually opens lower by roughly the amount of the dividend, since the cash is leaving the company and buyers from that day on will not receive it. A short seller gains from that drop. Your broker may also lower the price of certain open orders by the dividend amount on the ex-date, a buy-to-cover limit among them, so look at any order you left working once the stock has opened.

The adjustment is never guaranteed to match. Prices move at the open for many reasons. The dividend is one.

Special dividends

Special dividends are one-off payments. Some are large. A special of 5.00 on a 40 stock would mean a charge of 2,500 on that same 500-share short, due in cash or margin, whatever the price does. The price should fall by a similar amount, in theory. Even so, your account has to carry the debit on the day it lands, and a large debit can put a margin account under its maintenance requirement at exactly the wrong moment.

For very large distributions, the ex-date can be set differently from the usual convention. Read the company’s announcement first. Then check your broker’s corporate action notice.

Borrow costs sit on top

A payment in lieu is separate from the fee for borrowing the shares. On hard-to-borrow names the fee can be heavy. Lenders can also recall their shares. Around a dividend, both costs can arrive in the same week.

This is one of several ways shorting differs from simply owning stock in reverse, which short selling is a separate skill covers in more depth. For protecting the position, see how to set a stop on a short position.

Tax treatment

A payment in lieu that you make is treated differently from a dividend. How it is handled on your return depends on details such as how long the short was open, and the rules are specific enough that you should take the question to a tax professional with your year-end statements.