Dividend Stripping and Bonus Stripping — And the Tax Rules
These are tactics to book artificial losses around dividends and bonuses. Tax law specifically curbs them. Here’s how.
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Dividend stripping and bonus stripping are tactics some investors once used to create artificial capital losses for tax purposes around a dividend or bonus issue. Tax law now specifically restricts them. This is general education, not tax advice.
What dividend stripping was
The idea: buy a security just before its ex-dividend date, collect the dividend, then sell just after — when the price has dropped by roughly the dividend amount. That price drop created a capital loss to set off against other gains, while the dividend income was taxed separately (and was once tax-free).
What bonus stripping was
Similar, using a bonus issue: buy before the bonus, and after the bonus the original shares’ value drops (now spread across more shares). Selling the original shares at that lower price booked a loss, while the bonus shares were held.
How the law curbs it
Tax rules now disallow such engineered losses within specified windows around the record date (and extend bonus-stripping rules across securities and units). The loss can be denied or adjusted, defeating the tactic.
The practical takeaway
- Don’t build trades around booking artificial losses — the anti-avoidance rules are designed to catch exactly this, and getting it wrong invites scrutiny.
- Genuine tax-loss harvesting (selling real losers to offset gains) is legitimate and different from manufactured stripping losses.
Rules are detailed and change — consult a tax professional before any such strategy. Education only, not tax advice.
