Author Topic: Tax-free self dividend?  (Read 3320 times)

Grog

  • Bristles
  • ***
  • Posts: 296
Tax-free self dividend?
« on: August 13, 2014, 08:25:31 AM »
Hi everyone
in my journey to understand the world of stocks markets I stumbled across this idea. Since the stock value always decrease after the dividend-date, to represent the minor value due to the loss of dividend rights, I could very well create my own dividend by selling right before the dividend date and buying immediately after. I attach a picture of a mid-cap swiss index to look as an example.

In this way I gets no dividend, but I still geto to buy stock at a lower price, so increasing my number of shares.

since in Switzerland there is no capital gain tax, the only costs would be the one of the transaction, that for a very large portfolio tend to the swiss stamp tax (0.075% each way, so 0.15% in total).

Am I correct in assuming that in this way I get the dividend profit without paying taxes?

second question: it seems quite silly to me that this is possible, so where is the catch? I see that for this fund (attached) the dividend date are always the first monday of september, so it is quite predictable that you should sell the wednesday before.

Even if the spread and the daily variation make it so that I lose even 4-5% of the whole dividend, it still less than in taxes (25% bracket)

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8939
  • Registered member
Re: Tax-free self dividend?
« Reply #1 on: August 13, 2014, 09:40:25 AM »
Sounds feasible, but I question why your government would not tax capital gains, and only tax dividends.  That part seems unusual (US for example taxes both). 

daverobev

  • Magnum Stache
  • ******
  • Posts: 3439
  • Location: France
Re: Tax-free self dividend?
« Reply #2 on: August 13, 2014, 12:57:54 PM »
You need to check the govt doesn't see your sale and rebuy as trading (ie, as a job) and tax your profit as income, which is usually worse than dividends.

Do you have to pay the cost of trading?

If a stock pays a 3% dividend, quarterly that's 0.75% - if you're losing 0.15% your divi only works out to 2.4% annually.. or, a 20% loss. I know taxes will be higher than that.

Sounds like it'd work. But, maybe there is an 'accumulation' rather than 'distributing' version of the same fund? I know db do some of those.

Grog

  • Bristles
  • ***
  • Posts: 296
Re: Tax-free self dividend?
« Reply #3 on: August 13, 2014, 03:19:48 PM »
Accumulation etf exist but the fund must pay dividend tax before distributing. We don't have special taxes for dividend they are summed to your income and that's gives the taxable income. Whereas profit from trading are not to be notified, and there is a 0.075% tax on every transaction. Good point about distribution frequency something like this could only work with a single annual distribution.

Jags4186

  • Pencil Stache
  • ****
  • Posts: 595
Re: Tax-free self dividend?
« Reply #4 on: August 13, 2014, 04:57:54 PM »
How is this any different than a super complicated DRIP?  And if your investment had lost value you would be subject to wash-sale rules and not even be able to take the loss.  Seems horrible to me.
« Last Edit: August 13, 2014, 05:00:13 PM by Jags4186 »

Grog

  • Bristles
  • ***
  • Posts: 296
Re: Tax-free self dividend?
« Reply #5 on: August 13, 2014, 11:13:07 PM »
How is this any different than a super complicated DRIP?  And if your investment had lost value you would be subject to wash-sale rules and not even be able to take the loss.  Seems horrible to me.

Thank you for your input.
I'm sorry to bother you all with this question that use other rules and law, but I really can't find anything community-wise in CH. Nobody thinks about it and nobody write about it.
I know it is difficult to imagine a country where the rules of the game aren't the same, so let me rephrase it as a theoretical question:

Imagine a place where there is no tax on transaction and low transaction costs, but dividend are still taxed (coincidentally the situation of switzerland). Shouldn't the market reflect this situation? Why there is still a dip after dividend date? In a perfect market, everyone would sell before the dip and buy immediately after (because it makes sense, tax-wise), so the ETF course would show no sign of the dip. Is this right?


PS: DRIP is not the same, since with DRIP your dividend is still taxed.
PPS: wash sale doesn't exist in Switzerland, since you can't report any market losses anyway.

Grog

  • Bristles
  • ***
  • Posts: 296
Re: Tax-free self dividend?
« Reply #6 on: August 14, 2014, 03:00:00 AM »
I just want to quickly add, for all swiss investors, to forget about this strategy.

Since the new tax-law most swiss companies do not give avaway a dividend anymore, but they can distribute tax-free the capital in reserve instead. Problem is, it still mistakenly identified as dividend. That makes so that the overall dividend tax, coming from the swiss  companies that still distribute a normal dividend, is about 9%. So a dividend stripping (that's the name) is absolutely not worth it.

In the end...no capital gain taxes and a dividend tax of 9% for low bracket income. Now I know why so many people comes in Switzerland to retire :D