Substitute Dividends 

What are substitute dividends?

Assets held in margin accounts where the client is carrying a debit balance are generally subject to rehypothecation (being loaned out).

Under the 2003 Tax Act, substitute dividends do not qualify for the lower tax rates on qualified dividends.

Can I determine in advance if a substitute dividend will be received?

No.

Substitute dividends will be allocated based on a lottery system which makes it impossible to determine the outcome in advance.

Where are substitute dividends reported for tax purposes?

Substitute dividends are reported as “substitute payments in lieu of dividends or interest” in box 8 of IRS Form 1099-MISC and the additional credit to your account is reported on the same form as “other income”.

You report both items as “other income“ on Form 1040.