Payment in lieu of dividends for stocks *NOT* bought on margin

Discussion in 'Trading' started by tradegoodstocks, May 12, 2007.

  1. Is my broker allowed to loan my securities that I have in my marging account only if and when I actually have a debit balance, or also if I have only stocks and a credit balance in my margin account? While most sources recommend I put my dividend paying stocks in a cash account rather than a margin account (to avoid the unfavorable tax treatement of "in lieu" payments), the following three citations suggest a broker can only do it when I have actually bought the shares on margin. However I have not found a law saying this (or even know where I would have to look). My broker assigned me huge amounts of "in lieu" payments, although I never had a loan balance. Can anybody clarify please. I need to find the regulation/law, especially the one with the 140% rule in the below citations. Thanks!

    If you borrow in a margin account, there's a risk--not a big one, but a risk--that some of your dividends won't qualify for the 15% rate. It works like this: The brokerage firm is permitted to borrow stock from your account worth up to 140% of your outstanding loan balance and lend it to short sellers. If your stock is sold short when a dividend is paid, you get a "payment in lieu of dividends," which is taxed at ordinary income rates of up to 35% and reported on a 1099-Misc.vents/cite_guide_may.cfm

    Free Stock — loanable securities; that is, securities that can be used for loan or hypothecation. These securities are stock in a margin account that represents a percentage (140%) of the debit balance.

    To receive an in-lieu payment, an investor must have a margin account, have a balance in the account (meaning he has borrowed money to buy securities) and have his shares loaned out. ...
    Investors who have margin balances should check their brokers' policy on in-lieu payments and be aware of the tax implications when they file their 2004 returns.
  2. I'm sure others will respond with accurate info, but for now, I have read that if you talk to your broker they will make up the difference to you regarding your tax consequences.

    "Some/many/most/all (I do not know) brokerages will give you a "true-up" payment if you have received a PIK dividend to make up for the extra taxes you will be liable for - so you come out about even with a Qualified Dividend on an after-tax basis."
  3. ... thanks, but not so my broker. That's why I want to know what exactly the regulations are. Hope somebody is knowledgeable, thanks!h
  4. Has anyone seen any updates to this problem? My broker loaned a tax free ETF and offers NO compensation for me having to pay full on tax now.
  5. 1245


  6. zdreg


  7. 1245


    Then he should read his margin agreement which spells out the detail or call his broker.
  8. zdreg


    test 1
  9. zdreg


    test 2
  10. Dude when you borrow to buy any stock on margin you have no say which stock in your portfolio might get pledged on loan.
    #10     Mar 1, 2013