Portfolio Loss Harvesting Strategy Part 5: Qualified Dividends

In prior posts, I indicated that the I triggered losses in my portfolio when the benefit (ie., reducing my already recognized gains) exceed the costs (ie., bid-ask spread, fees, etc.).  Another potential cost that you have to look out for when triggering gain to “early” is the potential for a dividend to lose its status as a “qualified dividend”.

Very generally, Section 1(h)(11) provides that a “qualified dividend income” will be treated as “net capital gain”.  Bottom-line, this means that qualified dividend income taxed at the capital gain rate rather than your marginal rate.

One of the more important criteria for a dividend to qualify is a 61-day holding period.  The rules require that one holds the stock for at least 61 days during a 121-day period that begins on the ex-dividend date.

While special rules apply to reduce holding period when you have improperly hedged your position, I don’t really have to pay attention to these rules with my strategy since I don’t engage in hedges.  Therefore, I simply have to count the number of days I’ve held the stock to determine if I qualify.

In addition, there is a rule that provides that if the dividend related to an extraordinary dividend (very generally, a dividend that is at least 10% (5% in the case of preferred) of the fair value or basis of the stock), then any loss on the stock shall be treated as long-term capital loss to the extent of the dividend.  The purpose of this provision is to prevent someone from buying the stock, meeting the holding period, getting the dividend, and then selling the stock with a loss that, in part, results from the dividend.  While the dividend would qualify for the lower capital gain rate, this provision attempts to make any loss resulting from the sale of the stock to net against items that qualify for the capital gain rate (ie., no double benefit).

In terms of the cost benefit-analysis of my portfolio hedging strategy, I simply factor in the cost of the “extra” taxes I’d have to pay if selling the stock would cause me to fail to meet the holding period requirement.   Early on, I actually missed a couple of these because I was only aware of the dividend after it was paid, which could be long after the ex-dividend date, and long after I sold it (and didn’t meet the holding period requirement).

taylor swift stare down

Before I sell a stock now, I double-check to make sure that, unbeknownst to me, it hasn’t gone ex-dividend by checking on google/yahoo finance as well as cross-checking with a dividend calendar at http://www.nasdaq.com/dividend-stocks/dividend-calendar.aspx.

See also:  Portfolio Loss Harvesting Part 4:  Additional Sundries

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