"Payment in lieu of dividends" on tax form (USA)

[Mephistopheles]

Just getting around to do my taxes now.

 

Some of my dividends were reported as miscellaneous income (as opposed to ordinary or qualified dividends). Unfortunately, these are taxed as ordinary income, and not at the preferential dividend rate.

 

I did some digging and found that this line is for dividends on securities lent out for short selling.

 

However, the shares that received the dividends were not lent out shares. So I called IBKR and they told me that because I am on margin, a certain amount of dividends will be allocated as this. This is the first I am hearing of this, is this true? If you buy stock on margin, the dividends don't get the preferential tax rate?

 

For example, out of the $.12 JOE dividend in 4Q 2023, $.10 came in as a qualified dividend, and $.02 was "payment in lieu". That $.02 I have to pay regular income tax on. My JOE shares were never lent to short sellers. I don't really trust IBKR customer service, thus I am asking here.

 

Thanks!

Edited May 24 by Mephistopheles

[Dinar]

I do not think that this is correct.  Payment in lieu of dividends is when your shares are lent out.  This is regardless of whether you are using margin or not.  I used margin last year and none of my dividend income was payment in lieu of dividends.

[lnofeisone]

10 minutes ago, Mephistopheles said:

Just getting around to do my taxes now.

 

Some of my dividends were reported as miscellaneous income (as opposed to ordinary or qualified dividends). Unfortunately, these are taxed as ordinary income, and not at the preferential dividend rate.

 

I did some digging and found that this line is for dividends on securities lent out for short selling.

 

However, the shares that received the dividends were not lent out shares. So I called IBKR and they told me that because I am on margin, a certain amount of dividends will be allocated as this. This is the first I am hearing of this, is this true? If you buy stock on margin, the dividends don't get the preferential tax rate?

 

For example, out of the $.12 JOE dividend in 4Q 2023, $.10 came in as a qualified dividend, and $.02 was "payment in lieu". That $.02 I have to pay regular income tax on. My JOE shares were never lent to short sellers. I don't really trust IBKR customer service, thus I am asking here.

 

Thanks!

This is correct. Usually you get cash in lieu if you lend shares. Most people don't realize that (don't read the fine print) that dividend paid by the borrower will lose preferential tax status and get taxed as ordinary income. 

 

The other way you can get to this is how you got there. You are on margin so ibkr took hold of your shares as collateral. They lent them out and you now have cash in lieu but it's partial. 

[Mephistopheles]

1 minute ago, lnofeisone said:

This is correct. Usually you get cash in lieu if you lend shares. Most people don't realize that (don't read the fine print) that dividend paid by the borrower will lose preferential tax status and get taxed as ordinary income. 

 

The other way you can get to this is how you got there. You are on margin so ibkr took hold of your shares as collateral. They lent them out and you now have cash in lieu but it's partial. 

 

Ah - so, they don't show up on my lent shares, because IBKR took the shares as collateral against my margin, and lent them.

 

So even though I am not directly lending them, I still suffer the consequences of the tax treatment?

 

So the question here is - if I opt out of the "stock yield enhancement program", will it make a difference? Meaning, IBKR will still take stock from me as collateral and lend it as they wish?

 

So, it's not an IRS rule like the rep told me (which I am pulling my hair out trying to find), but it's just securities being lent?

[Mephistopheles]

10 minutes ago, Dinar said:

I do not think that this is correct.  Payment in lieu of dividends is when your shares are lent out.  This is regardless of whether you are using margin or not.  I used margin last year and none of my dividend income was payment in lieu of dividends.

 

Yea, IBKR customer service fails yet again....so back to square one. These shares do not show up as lent securities in my activity statement. Why am I getting payment in lieu?

[Dinar]

5 minutes ago, Mephistopheles said:

 

Yea, IBKR customer service fails yet again....so back to square one. These shares do not show up as lent securities in my activity statement. Why am I getting payment in lieu?

If at the day before ex-dividend the shares were lent out (either via a stock lending program or because you have a margin account) then this would happen.  Some brokers will lend out your shares without your permission even if you do not have margin debt simply because you have a margin account.  

[lnofeisone]

3 minutes ago, Dinar said:

If at the day before ex-dividend the shares were lent out (either via a stock lending program or because you have a margin account) then this would happen.  Some brokers will lend out your shares without your permission even if you do not have margin debt simply because you have a margin account.  

When you sign up for margin, there is a line that gives broker the permission. You are correct that they don't have to inform you when they lend out your shares. 

 

@Mephistopheles if you want to avoid this, you need cash only account where you don't sign up for security lending. 

 

 

[Dinar]

6 minutes ago, lnofeisone said:

When you sign up for margin, there is a line that gives broker the permission. You are correct that they don't have to inform you when they lend out your shares. 

 

@Mephistopheles if you want to avoid this, you need cash only account where you don't sign up for security lending. 

 

 

You need a margin account if you want to trade options.

[aws]

Your 1099 will not always be correct for a variety of reasons. It's probably easier to just fix it on your tax return than try to deal with the brokerage, especially for a small sum. Just enter the numbers as reported for misc income, then add another entry with a negative misc income to zero it out. I would do something like:

 

"Qualified dividend incorrectly listed as miscellaneous income"

 

And then do an additional qualified dividend for that amount to bring everything where you think it should be. The IRS might come back to you, but you can explain yourself to them. It's unlikely you ever hear about it again, and worst case scenario they propose an adjustment that puts you back in the same spot you were originally.

[Santayana]

2 hours ago, Dinar said:

You need a margin account if you want to trade options.

That is not true.  You can trade long puts/calls, sell covered calls, and sell cash secured puts without having a margin account.

[Dinar]

28 minutes ago, Santayana said:

That is not true.  You can trade long puts/calls, sell covered calls, and sell cash secured puts without having a margin account.

It must depend on the broker, or rules have changed.  15 years ago when I opened a couple of brokerage accounts, I needed to have a margin account in order to trade options, although I did spreads so may be that was the reason.

[Mephistopheles]

Thank you everyone for the feedback!

[pricingpower]

The right to lend out your collateral shares if you utilize margin borrowing is a regulatory requirement if I recall, some brokers are much better about trying to recall your shares on dividend dates or at least truing you up if you are given a worse tax treatment when lending.  IBKR also doesn't even seem to have any concept that REITs get a special dividend treatment since 2017, it's baffling.  I think poor management of this as basically a hidden cost on IBKR's margining rate. 

 

I ended up shifting my margin borrowing to Fidelity after IBKR jammed me on this a few times, Fidelity matched IBKR's margin rate and seems much more conscious around the issue.  

https://www.fidelity.com/tax-information/tax-topics/annual-credit-for-substitute-payments

[Mephistopheles]

On 5/31/2024 at 11:01 AM, pricingpower said:

The right to lend out your collateral shares if you utilize margin borrowing is a regulatory requirement if I recall, some brokers are much better about trying to recall your shares on dividend dates or at least truing you up if you are given a worse tax treatment when lending.  IBKR also doesn't even seem to have any concept that REITs get a special dividend treatment since 2017, it's baffling.  I think poor management of this as basically a hidden cost on IBKR's margining rate. 

 

I ended up shifting my margin borrowing to Fidelity after IBKR jammed me on this a few times, Fidelity matched IBKR's margin rate and seems much more conscious around the issue.  

https://www.fidelity.com/tax-information/tax-topics/annual-credit-for-substitute-payments

 

Yea, IBKR sucks. I am going to call Fidelity to ask for a rate match. I've heard Schwab has matched in the past as well. 

 

How do you like Fidelity's platform vs. IBKR?

 

Any particular tips on how to get them to match?

[aws]

I use both IBKR and Fidelity still. When I called Fidelity to rate match they just wanted me to say what I was getting from the other broker and they would write a message to their back office to request the match. He strongly hinted that if I say I would be willing to move assets over from that broker if I received the better rate that it would be more likely they would approve it, and they did.

 

Fidelity's customer support is generally much better when you call the active trader services team. They did help me with a very complicated transaction which required hand signed documents in multiple languages, whereas IBKR basically just ghosted me when I asked about the same transaction and almost caused me to miss the deadline on the offer.

 

I still use IBKR for some things because they have rebates when providing liquidity, but beyond that the vast majority of my activity went to Fidelity.