For a simple contract, the dividend equivalent is the per-share dividend amount multiplied by the number of shares and the delta1. Dividend equivalents are provided for by section 871(m) of the Internal Revenue Code2.

Consider a hypothetical example in which a simple contract has a dividend of USD 2 per share, 1,000 referenced shares, and a delta of 0.9. The dividend equivalent is 2 × 1,000 × 0.9 = USD 1,800. A simple contract with a delta of 0.5 is not a specified notional principal contract under this rule, so there is no dividend equivalent3.

If a gross amount that references a dividend is used in the calculation, there is a payment even when the net amount is zero. The article "Withholding Tax" explains how to decide which contracts are covered.

Notes

  1. 26 CFR § 1.871-15(j)(1)(ii). ↩

  2. 26 U.S.C. § 871(m). ↩

  3. 26 CFR § 1.871-15(d)(2)(i). A simple notional principal contract with a delta of 0.8 or greater is a specified notional principal contract. The example assumes a contract issued on or after January 1, 2018 that meets no other condition for being a specified notional principal contract and is not caught by the combined-transaction or anti-abuse rules. ↩