What is a Substitute Dividend Payment?
AKA "Sub Payment, DIV" on Form 1099-MISC
Did you receive a dividend from shares held in your margin account, but see the dividend payment listed in your 1099-Miscellaneous (1099-MISC) instead of your 1099-DIV? If so, this isn't an error. Instead, it indicates that your shares were lent out to aid a short sale from our fully paid securities lending program
Although you technically own the shares ("in street name"), once lent out, the IRS requires Broker-Dealers to treat dividend payments on loaned securities positions as payments received in lieu of dividends (substitute dividend payment on Form 1099-MISC) for 1099 tax reporting purposes. This is commonly referred to as hypothecation in the brokerage industry, which allows for leverage, and you may read more about this in your Margin Agreement.
Example of a Sub Payment, DIV on a Form 1099-MISC
Are there any tax implications for a Substitute Dividend Payment?
Ordinary and Qualified Dividend Treatment is foregone
When paid a dividend on shares lent out by our clearing firm in a margin account, it no longer classifies as dividend income. Instead, dividend payment(s) become a substitute dividend payment and classify as miscellaneous income that reports on Form 1099-MISC. As a result of your shares being lent out, any special tax treatment on dividend payments, such as qualified dividend treatment, is potentially foregone. Please reach out to a professional tax advisor for further information.