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Payment in Lieu of Dividends

Trading Term

A Payment in Lieu, (PIL) refers to a cash credit or debit made to an account in recognition of a cash dividend paid to stockholders of the issuer.

Received

A broker who finances client purchases of securities via margin loan is allowed by regulation to loan or pledge as collateral that client’s securities.  If a stock that you own is pledged or loaned by IBKR when it pays a dividend, you will not receive an ordinary dividend but a payment-in-lieu of a dividend (PIL).  It is also possible to receive PIL if a stock is on-loan through the Stock Yield Enhancement Program.

The PIL amount is received by IBKR and passed onto the customer. These payments are treated as ordinary income for U.S. taxpayers and are not generally eligible for the qualified dividend tax rate. IBKR reports payments-in-lieu of dividends on Form 1099-MISC.

Paid

Short position holders borrow shares and are liable to the long holder for any distributions, including cash dividends.  A cash debit will be processed as a payment in lieu (PIL) if the stock sold short pays a dividend. Payments in lieu paid on short positions may be tax deductible for U.S. taxpayers under certain circumstances.  Please consult your tax advisor for more information.

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