Why do I have a Substitute Dividend Payment?

What is a Substitute Dividend Payment?

AKA "Sub Payment, DIV" on Form 1099-MISC

Did you receive a dividend in your margin account, but for some reason, 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 generally indicates that your long shares were lent out to aid a short sale.

Although you technically own the shares ("in street name"), once they are 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 in the brokerage industry as hypothecation, 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 a dividend is paid on shares that were lent out by our clearing firm in a margin account, the dividend payment no longer classifies as dividend income. Instead, dividend payment(s) that become a substitute dividend payment classify as miscellaneous income and report on Form 1099-MISC. As a result, dividends are no longer subject to ordinary or qualified dividend treatment.