Dividend Treatment
It is vital that you understand how the dividends your stock generates will be treated for tax purposes while on loan.
Payment in Lieu of Dividend (Cash-in-Lieu)
When your shares are on loan and a dividend is paid, you do not receive the direct dividend from the stock issuer. Instead, you receive a "Payment in Lieu of Dividend" (Cash-in-Lieu of Dividends).
Classification as Ordinary Income
The difference between a direct dividend and Cash-in-Lieu is its tax classification:
Payment Type | Tax Classification | Common Implication |
Direct Dividend | May qualify for preferred rates (Qualified Dividends). | Generally, lower tax for US residents. |
Payment in Lieu | Classified as Ordinary Income (Ordinary Income). | Subject to higher tax rates and different declaration requirements. |
Mandatory Warning
Because the Cash-in-Lieu is taxed as Ordinary Income, the return generated by the FPSL program could have complex tax implications.
You must consult with your tax advisor about the appropriate tax treatment for this program and any tax implications associated with receiving stock lending benefits.
Market Dynamics and Short Selling
Am I supporting bearish positions against my own assets?
The primary purpose of lending shares by institutions is to facilitate transactions, which includes short selling.
Short Selling: A short sale occurs when someone borrows a stock to sell it, hoping to buy it back at a lower price in the future to return it.
Implication: By participating in the FPSL, your shares could be used to facilitate short sales which, theoretically, could exert downward pressure on the price of that asset.
While this may be a philosophical concern for some investors:
You maintain full ownership of your shares and remain subject to the same market exposure.
Your decision to participate or not is a personal choice between the potential additional income and the indirect support for short selling activity.
Important Clarification: Vest does not allow short selling. Your participation in the FPSL only makes your shares available to the lending market, but it does not alter the operations you can perform directly on the Vest platform.
Corporate Actions
How does the broker handle corporate actions while my shares are on loan?
If the issuer of your stock performs a corporate action (like a merger, stock split, or special dividend), the resulting new or different stock is automatically considered the lent stock in substitution for the original. This ensures that your economic position remains unchanged and that you receive the correct asset upon the end of the loan.
Securities offered by Northbound Securities, LLC Member FINRA/SIPC