For a dividend to be "qualified," the stock paying the dividend must (among other requirements) satisfy a Holding period requirement described in IRS Publication 550 p.28:
You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
For purposes of this holding period, does having a short position in the stock count as "holding the stock?"
Per the IRC Sec. 1(h)(11)(B)(3), dividends on shorted shares cannot be qualified:
(II) to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.
The same subsection defines the holding period:
(I) with respect to which the holding period requirements of section 246(c) are not met (determined by substituting in section 246(c) “60 days” for “45 days” each place it appears and by substituting “121-day period” for “91-day period”), or
Now, if we look at IRC Sec. 246(c), we find this:
(4) Holding period reduced for periods where risk of loss diminished
The holding periods determined for purposes of this subsection shall be appropriately reduced (in the manner provided in regulations prescribed by the Secretary) for any period (during such periods) in which—
(A) the taxpayer has an option to sell, is under a contractual obligation to sell, or has made (and not closed) a short sale of, substantially identical stock or securities,
So to answer your question: no, period during which the stock has been shorted is not included in the holding period for the capital gains rate tax treatment qualification under 26 USC 1(h).
