Being paid by brokerage lending shares to short sellers

[fh2000]

I am doing my tax, and just noticed that I was paid interest (about $2000) because my brokerage lent my shares to short sellers. I am not sure which stock, and for how long. I am not sure if they needed owners' permission before they lent the shares.

Just something new to me.

[Dash man]

Quote:

Originally Posted by fh2000 I am doing my tax, and just noticed that I was paid interest (about $2000) because my brokerage lent my shares to short sellers. I am not sure which stock, and for how long. I am not sure if they needed owners' permission before they lent the shares. Just something new to me.

You probably signed something you didn't read when you opened the account.


Sent from my iPhone using Early Retirement Forum

[Texas Proud]

I would look to make sure you got all the dividends you were expecting... it might just be paying you for missed dividends... have no clue but would be a guess of mine...

And if so, then your tax situation is worse than if you had received qualifying dividends...

I do not think they pay you just to lend the shares as you do not know if they were lent or not...


Maybe someone with actual knowledge can chime in here and let us know....

[catotx]

There are two possible meanings to the word "interest" in your post.

1) The interest is "in-lieu payment" for dividend payments. This happens when you have a margin loan.

2) The interest is a payment by the broker for lending out your shares. The only broker I know of that pays you when it lends out your stocks is Interactive Brokers. But you need to opt in for that.

[fh2000]

Thank you all for your responses. My broker is indeed InteractiveBrokers. Your responses forced me to really look into what I actually got.

It is "Substitute payments in lieu of dividend or interest" from 1099-misc. There is an article from Motley fool stating the downside:
Substitute Payment in Lieu of Dividends -- The Motley Fool

I will give my broker a call tomorrow to see how I can take this off of my profile.

[jim584672]

You are going to meed to change it from a margin account to a cash account. Part of the margin agreement is that they can lend your shares.

[Texas Proud]

Quote:

Originally Posted by fh2000 Thank you all for your responses. My broker is indeed InteractiveBrokers. Your responses forced me to really look into what I actually got. It is "Substitute payments in lieu of dividend or interest" from 1099-misc. There is an article from Motley fool stating the downside: Substitute Payment in Lieu of Dividends -- The Motley Fool I will give my broker a call tomorrow to see how I can take this off of my profile.

Yep, it was what I thought it was.... now you get to pay the extra taxes...

Bummer for you...

[catotx]

Generally a broker does not loan out shares unless there is a margin loan. If you have a margin loan, then you are taking advantage of the very attractive margin rates at Interactive Brokers. The negative is that qualified dividends could become disqualified.

[marko]

Just out of curiosity, if one had wanted to sell those shares at the time would you be able to or were they technically in the hands of someone else?

I don't know how this works.

[jim584672]

Quote:

Originally Posted by marko Just out of curiosity, if one had wanted to sell those shares at the time would you be able to or were they technically in the hands of someone else? I don't know how this works.

This is not a concern you need to worry about. They will either cover the short by buying back the shares and giving them back to you, or more likely just borrow them from another customer or firm and give them back to you.

[2017ish]

Quote:

Originally Posted by jim584672 You are going to meed to change it from a margin account to a cash account. Part of the margin agreement is that they can lend your shares.

Yep. It may be a separate "hypothecation Agreement" or just an addendum to the margin agreement, but typically required for any margin account.

[gauss]

As a former Interactive Brokers customer, I remember something new about being paid to lend out shares as described by OP. Perhaps it is offering the ability to loan the shares even when a margin loan is not outstanding, but I am just speculating.

I believe this started after a change in the regulatory rules to limit a particular type of uncovered/naked trading.

I think this was in addition to the normal margin rules that have been in place since at least the 90s when I became active in this.


-gauss

[gauss]

I suspect this is the IB program being referenced "Stock Yield Enhancement Program" http://ibkb.interactivebrokers.com/node/1838

and also this too.

Note that there are provisions to opt-in and opt-out.

Note also that payment-in-lieu and the associated tax consequences applies too.

-gauss

[pb4uski]

Also, the payments are not tax-advantaged like dividends are if that matters to you.

Quote:

However, there's a huge downside to payments in lieu: they don't qualify for favorable tax rates on qualified dividends. Currently, qualified dividends have maximum rates of 0% to 20% depending on your regular tax bracket, but they always save you at least 10 percentage points on the tax rate you pay on the dividends.

[45th Birthday]

Some brokerage firms will "gross up" the dividend in lieu payments and send a payment in compensation, set at the highest marginal tax rate. Not bad if you can manage income to be below that. Morgan Stanley is one of these. They always have a disclaimer that they reserve the right to discontinue at any time.

[Sunset]

Do ALL brokerages make the payments in lieu ? for margin accounts.

I never really paid attention to this, and I bet a brokerage could easily "save" millions by not paying it out.

[catotx]

Quote:

Originally Posted by Sunset Do ALL brokerages make the payments in lieu ? for margin accounts. I never really paid attention to this, and I bet a brokerage could easily "save" millions by not paying it out.

They have to pay you. It is dividend from the stock. If the broker loans out the stock when the dividend is paid out, they have to make it whole to you.

[jim584672]

Now I am wondering what happens to your voting rights for the shares they lend out of your account.

[gauss]

Quote:

Originally Posted by jim584672 Now I am wondering what happens to your voting rights for the shares they lend out of your account.

The voting rights go to the borrower while shares are lent out.

[jim584672]

Street name stock, legally speaking, is not owned by you, but by Cede & Co.. Cede & Co. legally votes on your behalf, but Cede is the owner. Cede & Co. owns all stock in street name.