Tax treatment of dividends paid on short positions
"In the USA there are two ways this situation can be treated. First, if your short position was held less than 45 days. You have to (when preparing the taxes) add the amount of dividend back to the purchase price of the stock. That's called adjusting the basis. Example: short at $10, covered at $8, but during this time stock paid a $1 dividend. It is beneficial for you to add that $1 back to $8 so your stock purchase basis is $9 and your profit is also $1. Inside software (depending what you use) there are options to click on ""adjust the basis"" or if not, than do it manually specifically for those shares and add a note for tax reviewer. Second option is to have that ""dividednd payment in lieu paid"" deducted as investment expence. But that option is only available if you hold the shorts for more than 45 days and itemize your deductions. Hope that helps!"
I don't do this at all, but it's the internet, so hey, why not?  According to the IRS, penalties and fines are only non-deductible when they are paid for actual violations of laws/regulations.    So what crushedbyadwarf said is probably correct.  The penalty/fine reduces their income, and they become entitled to a refund on the tax they paid on that income.  It's still a questionable tax treatment of the penalty/fine. "It sounds like ""bonus shares"" are the same as a stock dividend. Stock dividends are equivalent to a stock split except for accounting treatment (good explanation here: http://www.accountingcoach.com/online-accounting-course/17Xpg05.html). As an investor, the only likely effect of a stock dividend is to make it more complex to keep track of cost basis and do your taxes. There's no economic effect, it's just rearranging accounting numbers." &gt; You also have to think about tax on dividends from these stock options, which is only 15%, which is paltry to regular incometax rate that the rich pay on their salaries  dividends is just cash being removed from companies and being paid out directly to the stockholder  if dividends get taxed at a higher rate, every company would just use that same cash to buy back shares since that would be more tax efficient - the stockholder would receive compensation in higher stock prices which they could then sell instead of receiving a dividend. Thus, they would pay capital gains rate instead of your new dividend rate.  The dividend rate must be the same as capital gains rate for this reason. They are not free money since the stock price gets decreased when a dividend is paid out - the company gets poorer when they pay out the dividend. "The first rule I follow is pretty simple: Get paid for what you do. Earn a return on what you own. If you are running your company prudently, you should earn a salary for the position and responsibilities you hold within the business. This salary should be competitive. You should be able to replace yourself in the business at this salary. If your title is ""President"" or ""CEO"" - look for market rate salaries for others in that position within your industry and company size. If you wear multiple hats in a small business, you will likely have to blend this salary based on those various positions.  Based on how you run your business, the money left over at the end of the year after you and your team takes a competitive wage is your profit. If there isn't any profit, then you might want to do some work on your business model. But if their is a profit, then it's a clear return on what you own and not just a payment for work completed. The idea would be that you could exit the business as an operator, pay someone else to do exactly what you do, and you would continue to get that profit return at the end of the year. This is when a business acts like a true asset.  Whether you take your money in salary or profit distributions (or dividends) depending on your structure, taxes are about the same. W2'd salaries get normal employee contributed taxes, but then of course the company matches these. It is identical if you take a guaranteed payment or distribution that gets hit with self employment taxes. Profits are also going to get hit with the same taxes.  Follow ups: 1) A fair salary would be a competitive market wage for the position you hold within the business. What is left over would be considered true profits and not just fabricated profits by taking a lower than market wage to boost the appearance of profitability. 2) Shareholders requesting salary information would be covered in your Operating Agreement or Shareholder Agreement. This might be terms you set with your investors. Or you might simply set a term that you only need approval if a single salary exceeds a cap (like $250,000). Which would mean you would need to present why you deserve a higher salary and have your board approve (if you are governed by said board via your investors). Profitability is a different ballpark. Your investors most likely have a right to see a monthly, quarterly, and/or annual Profit & Loss statement which should clearly state profitability. I can't imagine running a completely closed book company to my investors. Actually... I can't really imagine ever investing in a company where I am not permitted to see the financials.  Something to also consider here is the threat of trying to keep your profit numbers low in order to not pay taxes or to pay yourself a higher salary. If you ever plan to sell or exit the company, most widely accepted valuations of a business are done from profits (or EBIDTA). You might think you are saving yourself a couple points on taxes by avoiding profits in the short term, but if you exit the business and get a 3-5X (or even up to 12X in some cases) multiplier on your annual profits, you might be kicking yourself for trying to hide them through your accounting practices. Buyers will often sniff out an owner who created false profits by not paying themselves, but what's harder to do is figure out how much profits should have been when there were none on the books. By saving yourself $100,000 in taxes this year, could add up to close to $1,000,000 in an acquisition.  Good luck." "A mutual fund could make two different kinds of distributions to you: Capital gains: When the fund liquidates positions that it holds, it may realize a gain if it sells the assets for a greater price than the fund purchased them for. As an example, for an index fund, assets may get liquidated if the underlying index changes in composition, thus requiring the manager to sell some stocks and purchase others. Mutual funds are required to distribute most of their income that they generate in this way back to its shareholders; many often do this near the end of the calendar year.  When you receive the distribution, the gains will be categorized as either short-term (the asset was held for less than one year) or long-term (vice versa). Based upon the holding period, the gain is taxed differently. Currently in the United States, long-term capital gains are only taxed at 15%, regardless of your income tax bracket (you only pay the capital gains tax, not the income tax). Short-term capital gains are treated as ordinary income, so you will pay your (probably higher) tax rate on any cash that you are given by your mutual fund. You may also be subject to capital gains taxes when you decide to sell your holdings in the fund. Any profit that you made based on the difference between your purchase and sale price is treated as a capital gain. Based upon the period of time that you held the mutual fund shares, it is categorized as a short- or long-term gain and is taxed accordingly in the tax year that you sell the shares. Dividends: Many companies pay dividends to their stockholders as a way of returning a portion of their profits to their collective owners. When you invest in a mutual fund that owns dividend-paying stocks, the fund is the ""owner"" that receives the dividend payments. As with capital gains, mutual funds will redistribute these dividends to you periodically, often quarterly or annually. The main difference with dividends is that they are always taxed as ordinary income, no matter how long you (or the fund) have held the asset. I'm not aware of Texas state tax laws, so I can't comment on your other question." Generally, ETFs and mutual funds don't pay taxes (although there are some cases where they do, and some countries where it is a common case). What happens is, the fund reports the portion of the gain attributed to each investor, and the investor pays the tax. In the US, this is reported to you on 1099-DIV as capital gains distribution, and can be either short term (as in the scenario you described), long term, or a mix of both. It doesn't mean you actually get a distribution, though, but if you don't - it reduces your basis. Profit after tax can have multiple interpretations, but a common one is the EPS (Earnings Per Share).  This is frequently reported as a TTM number (Trailing Twelve Months), or in the UK as a fiscal year number.  Coincidentally, it is relatively easy to find the total amount of dividends paid out in that same time frame. That means calculating div cover is as simple as:  EPS divided by total dividend.  (EPS / Div). It's relatively easy to build a Google Docs spreadsheet that pulls both values from the cloud using the GOOGLEFINANCE() function.  I suspect the same is true of most spreadsheet apps.  With a proper setup, you can just fill down along a column of tickers to get the div cover for a number of companies at once. "First, do you get charged a commission or other fee for reinvesting?   Second, why would capital gains and dividends be grouped together? If the broker charges you for that run away. As Joe explained, it is done as a courtesy. Doesn't this mean if I sell the stock, the profit will be used to buy   that stock right back? No, this is only the capital gains distributions of funds. Lastly, there are two additional checkbox options I was hoping   somebody could explain: ""All equity positions currently held in this   account"" and ""Future equity purchases, transfers, and deposits to this   account"". ""All equity positions"" means your selection will be valid for all the positions you already have. ""Future positions"" means it will only affect future positions, not the ones you already have. For example: FOLLOW-UP: Looking around, some people suggest not doing this for   taxable accounts because it complicates cost basis reporting. Is this   a valid concern? Doesn't the brokerage handle that and send you the   information when you sell the stock? Yes, because you end up with tons of positions and you need to track the cost basis for each. Brokers are required to report cost-basis on 1099-B now, so its less of a problem, but before 2011 you'd have 10's of positions each year (if you have a monthly dividend, for example) each with different cost basis, and you'd usually sell them all at once. Go figure the gain. So the new 1099-B reporting regulations help a little on this, but it only kicks in for everything starting of 2013 IIRC. Fortunately, for some investments (mutual funds, mainly) you may chose averaging, but it has drawbacks as well."