What is dividend washing?

'Dividend washing' refers to transactions where investor X who holds a parcel A of shares in a listed public company Z sells those shares just before it goes ex-dividend (the right to the dividend and any franking credits remains with the seller).

What is dividend stripping with example?

A has not only earned a tax-free profit of Rs. 40,000 on the dividend income but also booked a loss of Rs. 50,000 on which he can set-off his other short term capital gain and hence saved tax on it. This practice of buying and selling shares to book tax free profits and avoid taxes is called dividend stripping.

What is franking period?

A private company has a single franking period, which is the same as its income year for other tax purposes – typically, 1 July to 30 June.

What is the difference between franked and unfranked dividends?

Franked dividends include a tax credit called a franking or imputation credit. This is equivalent to the amount of tax paid by the company for your portion of share ownership, so you can use this credit to reduce your taxable income. Unfranked dividends carry no tax credit.

How do you calculate franking?

Calculating Franking Credits

Franking credit = (dividend amount / (1-company tax rate)) - dividend amount.

WHAT IS A DIVIDEND? (SMALL BUSINESS)

How long do you have to hold a stock to collect a dividend?

To collect a stock's dividend you must own the stock at least two days before the record date and hold the shares until the ex-date.

Does dividend stripping work?

Investors. For an investor, dividend stripping provides dividend income, and a capital loss when the shares fall in value (in normal circumstances) on going ex-dividend. This may be profitable if income is greater than the loss, or if the tax treatment of the two gives an advantage.

What is the 45 day rule?

More Information. The 45 Day Rule also known as the Holding Period Rule requires resident taxpayers to continuously hold shares "at risk" for at least 45 days (90 days for preference shares, not including the day of acquisition or disposal) in order to be entitled to the Franking Credits as a franking tax offset.

Should I sell stock before or after dividend?

You must have acquired your shares before the ex-dividend date in order to receive a dividend. If you acquired your shares on or after the ex-dividend date, the previous owner will receive the dividend. Sell your shares on or after the Ex-Dividend Date and you'll receive the dividend.

Can you buy a stock just before the dividend?

The ex-dividend date for stocks is usually set one business day before the record date. If you purchase a stock on its ex-dividend date or after, you will not receive the next dividend payment. Instead, the seller gets the dividend. If you purchase before the ex-dividend date, you get the dividend.

What is the holding period rule?

The holding period rule requires shares to be held 'at risk' for a continuous period of at least 45 days (90 days for preference shares) during the qualification period. The 45-day and 90-day periods don't include the day of acquisition or, if the shares have been disposed of, the day of disposal.

Is bonus stripping legal?

Bonus stripping in the Income-tax act

In order to claim a short-term capital loss, the acquired share units must be purchased 3 months prior to the date of bonus issue. The share units must be sold within 9 months, after the date of the bonus issue.

How does a dividend arbitrage work?

Dividend arbitrage is an options trading strategy where an investor longs a stock ahead of its ex-dividend date and then shorts an equivalent number of stocks via put options after collecting the dividend. The arbitrage strategy is applied to a stock with a high dividend and low volatility (lower options premium).

How do you capture dividends?

A dividend capture strategy involves purchasing a stock prior to its ex-dividend date, then selling it later. Remember, if you own a stock on its ex-dividend date then you're entitled to receive the dividend that's set to be paid out. It doesn't matter if you sell the stock shortly afterward.

What is the downside to dividend stocks?

While the disadvantages of cash dividends are:

Tax inefficiency. Investment risk. Sector concentration. Dividend policy changes.

How can I avoid paying tax on dividends?

One way to avoid paying capital gains taxes is to divert your dividends. Instead of taking your dividends out as income to yourself, you could direct them to pay into the money market portion of your investment account. Then, you could use the cash in your money market account to purchase under-performing positions.

Are dividends profitable?

Dividend is usually a part of the profit that the company shares with its shareholders. Description: After paying its creditors, a company can use part or whole of the residual profits to reward its shareholders as dividends.

How do stocks hedge dividends?

Investors trying to pursue a dividend-capture strategy need to protect themselves against the risk of the stock price falling on the ex-dividend date. In order to hedge against this risk and still capture the dividend, you buy a put option where the delta would be high on the day the stock price drops.

What does tax arbitrage mean?

Tax arbitrage is the practice of profiting from differences that arise from the ways various types of income, capital gains, and transactions are taxed.

What is an arbitrage transaction?

What Is Arbitrage? Arbitrage is trading that exploits the tiny differences in price between identical assets in two or more markets. The arbitrage trader buys the asset in one market and sells it in the other market at the same time in order to pocket the difference between the two prices.

How can I save tax on my bonus?

Can bonus shares be sold?

Shareholders may sell the bonus shares and meet their liquidity needs. Bonus shares may also be issued to restructure company reserves. Issuing bonus shares does not involve cash flow. It increases the company's share capital but not its net assets.

How is stock bonus taxed?

A bonus is always a welcome bump in pay, but it's taxed differently from regular income. Instead of adding it to your ordinary income and taxing it at your top marginal tax rate, the IRS considers bonuses to be “supplemental wages” and levies a flat 22 percent federal withholding rate.

What is the 45 day rule for dividends?

The 45 day rule (sometimes called dividend stripping) requires shareholders to have held the shares 'at risk' for at least 45 days (plus the purchase day and sale day) in order to be eligible to claim franking credits in their tax returns.

Should I sell FIFO or LIFO stock?

FIFO vs LIFO Stock Trades

Under FIFO, if you sell shares of a company that you've bought on multiple occasions, you always sell your oldest shares first. FIFO stock trades results in the lower tax burden if you bought the older shares at a higher price than the newer shares.