What is 'Manufactured Payment'

A manufactured payment is made to pass through dividend and interest payments from the borrower to the lender of those securities. Manufactured payments, represented as interest or dividend payments, occur frequently in securities lending. In such an arrangement, title to the securities passes to borrower, but the lender customarily maintains the right to payments which accrue on the security.

BREAKING DOWN 'Manufactured Payment'

Short selling is the most common situation in which one must borrow securities and a manufactured payment might be made. In order to sell a stock short, a trader must borrow the stock. Since the short seller has borrowed the security, dividend payments made on the stock during the term of the loan must be paid to the lender. This can be a significant cost of short selling if a stock pays a high dividend yield. Brokers should notify the borrower of a security of the possibility that they may need to make a manufactured payment. They may even reduce the borrower's cash position in your account to cover the payment.

Tax Rules Around Manufactured Payments

If a trader sells a stock short, they will have to remit payments to the lender in lieu of the dividends if the trader holds the short sale open at least 46 days. If a trader closes the short sale by the 45th day after the date of the short sale, they can't deduct the manufactured payment on their taxes. Instead, they must increase the cost basis of the stock used to close the short sale by that amount.

To determine how long a short sale is kept open, a trader shouldn't include any period during which they hold, have an option to buy, or are under a contractual obligation to buy identical stock or securities. They also shouldn't include any period during which they are considered to have diminished their risk of loss from the short sale by reason of holding one or more other positions in substantially similar or related properties.

Manufactured payments should be treated as investment interest expenses, subject to all of the rules and regulations involving investment interest expense. Report these expenses on Schedule A of a tax return. If a trader doesn't itemize their deductions, investment interest expense won't be tax-effective. If a trader doesn't take the deduction because they don't itemize deductions, the deduction is lost forever. There are no "elections" that you can make in order to use the investment interest deduction to reduce any gain (or increase the loss) when you eventually close your short position.

  1. Down Payment

    A down payment is a type of payment made in cash during the onset ...
  2. Payment Option ARM Minimum Payment

    A payment Option ARM Minimum Payment is an option to make minimum ...
  3. Past Due

    Past due is a loan payment that has not been made as of its due ...
  4. Buy To Cover

    Buy to cover is a trade intended to close out an existing short ...
  5. Real Estate Short Sale

    In real estate, a short sale is when a homeowner in financial ...
  6. Short Selling

    Short selling is the sale of a security that is not owned by ...
Related Articles
  1. Investing

    Short selling basics

    Short sellers enable the markets to function smoothly by providing liquidity and also serve as a restraining influence on investors’ over-exuberance.
  2. IPF - Mortgage

    How Much Money Do I Need to Put Down on a Mortgage?

    When you buy a home, one of the biggest up-front expenses is the down payment.
  3. Personal Finance

    Is Making Biweekly Mortgage Payments A Good Idea?

    Do you think making two payments a month for your mortgage is a good idea? Think twice about that. We tell you why.
  4. IPF - Mortgage

    Understanding the Mortgage Payment Structure

    When you get a mortgage to buy a home, you need to understand the structure of your payments, so you know how expensive the whole thing will ultimately be.
  5. Investing

    Short Selling Risk Can Be Similar To Buying Long

    If more people understood short selling, it would invoke less fear, which could lead to a more balanced market.
  6. Investing

    What Is A Short-Sale Property & How Does It Work?

    A short sale is an alternative to foreclosure whereby indebted owners get permission from a bank to sell their house for less than amount of the mortgage.
  1. What is the difference between a short squeeze and short covering?

    Learn about short covering and short squeezes, the difference them and what causes short squeezes. Read Answer >>
  2. How long can you short sell for?

    In theory, you could keep a short position open indefinitely, but in practice, a lender can demand you "buy to cover" the ... Read Answer >>
Trading Center