Taxes From A To Z (2017): X Is For X (Or XD)

It’s my annual “Taxes from A to Z” series! If you’re wondering whether you can claim wardrobe expenses or whether to deduct a capital loss, you won’t want to miss it.

X is for Ex-Dividend.

X or XD is used to indicate that a stock is trading ex-dividend. Ex-dividend marks the date that the right to receive a dividend switches over from the buyer to the seller.

Here’s how it typically works: A company announces on the “dividend declaration date” that it will pay out a dividend. The company then looks to the “dividend record date” to determine which shareholders are entitled to receive the dividend (if you do not hold shares on the dividend record date, you are not entitled to receive the dividend) which will be paid out on the dividend payment date. In order to ensure that the correct shareholders get the dividend (remember, shares of stock are constantly being traded and records must be updated), there’s an ex-dividend date. The ex-dividend date falls between the dividend declaration date and the dividend record date and marks the date upon which the right to receive the dividend ends. If you buy stock before the ex-dividend date, you are entitled to receive the declared dividend. If you buy stock after the ex-dividend date, the seller is entitled to receive the declared dividend even if you own the stock when the dividend is paid.

If that doesn’t seem quite fair, don’t worry. Typically, the value of a stock is adjusted to make up for it. This is because the amount paid out in dividends is paid from the company (and reduces the asset value of the company).
The person who receives the dividend is the person responsible for paying the tax on the dividend: it doesn’t matter who owns the stock. The ex-dividend date is important, however, for determining the holding period for qualified dividends (those are taxed at capital gains rates instead of ordinary income tax rates).

For more Taxes A to Z, check out: