Interactive Brokers is hypothecating my fully paid shares between the date that I buy and the settlement date. Does anyone know any rules on this? My understanding is that they cannot hypothecate the shares at all unless I owe margin. This is problematic for me because I am sometimes buying the day before the ex-div which according to the SEC gives me the right to the div. IB is loaning out my shares so that on the record date, someone else has them and I get a payment in lieu. Then I have to pay a higher tax rate. Regardless, I object to IB loaning out my shares for their profit when I have fully paid for them.
Huh? 1) Settlement is T+3. They aren't "fully paid for" until T+3. 2) Did you agree to allow IB to load your shares (if you have a margin account, I bet you did)? If so, why complain now.
I think they are treated differently by the IRS (div- long term capital gains vs PIL-ordinary income), the broker (depends on the broker) should credit you the (tax) difference. I may be out of date on this, but it was this way at one time and still may be.
kgoodfl -- do you have a margin account? If so, which kind? But maybe IB will credit you for the difference anyway. Here's how Fidelity handles that issue: http://www.powerstreet.com/planning/tax/content/annualcredit.shtml
The paid-in-lieu is taxed as ordinary income so you pay your normal incremental tax rate (e.g. 28, 31, . . .%). Dividends, if they otherwise meet requirements to be "qualified", are taxed at no more than a 15% rate. (Although all of this may change in 2013.)
In 2007 IB was pretty poor in handling the issue. Here is a thread from back then: http://www.elitetrader.com/vb/showt...68&highlight=Pay+and+in+and+lieu+and+dividend I don't know if they ever made any change to try to reduce or eliminate the cost to their customers. Jack
I trade mostly muni-bond ETF's through IB. Dividends on munis are tax free. Payment in Lieu of dividends is an issue for me. Also, past years' reporting of some of my tax free ETFs dividends as taxable dividends has also been a problem. In spite of the lost tax $$$, I find that my costs are still lower trading through IB. I just wish that they would get the accounting straight so that I could have the benefits that are due me. I just signed up for the "Stock Yield Enhancement" program a few days ago. I guess that if I'm going to have to take the unfair hit on the taxes anyway, I might as well get a few pennys back. I don't expect that the issues with Muni-bond ETFs will be fixed since I'm sure that I'm in a microscopic minority of traders for IB.